IHT changes for non-UK domiciles
Holding properties in overseas structures had for many years been viewed as an effective solution in order to avoid various types of tax. However for non-UK domiciles, the introduction of the 2013 Annual Tax of Enveloped Dwellings (ATED) meant they had to decide whether to pay the new tax or remove their property from company ownership. This would mean ATED would not have to be paid, but inheritance tax (IHT) might be.
Residential UK property which is held in an overseas structure will be subject to IHT from 6th April 2017, when the changes come into force. This will apply to non-UK domiciles as well as trusts where the settlors or beneficiaries are non-UK domiciles.
Where a non-UK domicile passes away, an IHT charge will be due if they hold shares in an overseas ‘close’ company which possesses UK residential property. Where a trust holds UK property through a company offshore, depending on exact terms, it will be subject to a future IHT charge every decade, or when an individual who holds a ‘life interest’ dies.
If offshore share value or interest in an entity is derived from UK residential property, it will no longer be excluded from being chargeable and in turn, be subject to taxation.
Any relevant debt, such as a property mortgage, will be permitted by way of a deduction as the IHT charge will take account of this. When the value of the property is determined however, loans between the connected parties will not be deducted in this way.
Even where no IHT is due, an IHT return should be put forward when there is a chargeable event, where UK property is owned directly by an individual or trust. The responsibility for paying the tax is with the executor under the current rules, as well as beneficiaries or trustees of the concerned estate.
Identifying whether a chargeable event has occurred may cause difficulties, and possibly lead to an IHT liability. The HMRC has acknowledged this, and has thus extended the period in which chargeable events can be reported and tax can be paid. Power of the HMRC is to be expanded also, giving them the ability to impose a legal charge at Land Registry on UK property held indirectly, meaning it cannot be sold until the IHT balance has been paid.
The consultation document also outlines that the legal owner of a property, including company directors which hold the property, will be imposed with new liability. The extent of the liability has not yet been defined.