Offshore
companies holding UK residential property will no longer be opaque for UK
Inheritance Tax (IHT) purposes from
6 April 2017. The change is being
achieved, courtesy of the Finance Bill 2017 as currently drafted, by removing
IHT ‘excluded property’ status from an interest in a closely held company (see the
15 December 2016 blog for a brief definition) which derives its value, directly
or indirectly, from UK residential property.
In
plain English, that means that anyone owning a right or interest in such a
company will have an asset that will be taxable to 40% IHT if the person owns
that interest on death. The same
situation applies if instead the person is a partner in a partnership invested
in UK residential property.
From
the introduction of the Annual Tax on Enveloped Dwellings (ATED) in 2013, using a company to hold a UK residential property
came with an annual ATED tax bill, if the property was simply used as a family
residence, but as the company structure prevented the UK property from being
exposed to IHT, this was an annual price that many non-UK domiciled families
were willing to consider paying.
However, now that the IHT protection of the company is being lost, as a
result of the Finance Bill 2017 changes, a key reason for keeping a UK
residential property in an offshore corporate structure is about to be
lost. Not surprisingly, therefore, removing
the residential property from the corporate structure into personal ownership
is becoming more prevalent.
For
many non-domiciled families with UK residential property interests, this will
be their first brush with IHT. Two key
planning points will be of interest to non-dom families faced with this new
predicament.
Firstly,
a tax deferred is potentially a tax mitigated.
Married couples jointly owning UK residential property in their personal
capacities should ensure that they make UK Wills leaving their UK residential
property outright to each other on death or, if that is not desired, in a
certain sort of trust written into the Will instead, which gives the surviving
spouse a life interest in the property.
If a Sharia compliant distribution will be required on death, a suitably
flexible life interest will trust may still offer an acceptable solution. Structuring matters this way will ensure
that, on the death of the first spouse, their interest in the UK property will
attract the benefit of the generous, 100% IHT spouse exemption, so that no IHT
will be payable on the first spouse’s death.
The deferral will give the surviving spouse the opportunity to sell the
UK residential property and take the sale proceeds out of the UK before the
surviving spouse’s death. As long as the
survivor does not own UK residential property at their death, there will be no
IHT provided the sale proceeds are abroad.
For some families, this simple estate plan will suffice. In short, making a UK Will in the correct
format secures a complete IHT exemption for non-dom married couples on the
first death.
If
the corporate structure owning the UK residential property interest is to be
retained notwithstanding these changes, the owner of the interest in the
company should ensure that their interest is left to their spouse in a way that
attracts the IHT spouse exemption. As
the company will invariably be a non-UK company, advice should be sought in the
jurisdiction in which the company is registered as to whether making a Will in
that jurisdiction will be the best means of transferring the interest in the
company to the surviving spouse on death.
An English tax adviser can confirm whether the terms of any foreign Will
will secure the IHT spouse exemption.
Secondly
- be wary of the potential IHT consequences of lifetime gifts of personally
held UK residential property. The IHT
legislation prevents lifetime gifts of assets being effective for IHT purposes
if, at any later stage, the gifted property is not enjoyed to the virtue entire
exclusion of the giver. These are
referred to as gifts with reservation of benefit. According to HMRC, that means that if parents
give their occasional London residence to, say, their children and continue to
occupy that residence in the absence of the children for more than two weeks
each year thereafter, the residence will still be taxed to IHT on a parent’s
death, even if the parent had made a Will in the format above. There are a couple of statutory let outs to
the reservation of benefit rules for gifts involving residences but, in
general, gifts with reservation of benefit are to be avoided at all costs.
