In the draft legislation released on 5 December 2016 the government confirmed the announcements made in the 2015 Summer Budget and following consultation, that Inheritance Tax (IHT) will be extended to UK residential properties held by non-domiciled individuals through overseas vehicles such as offshore partnerships, close companies or non-resident settlements. In line with other changes made by the government affecting non-domiciled individuals the rationale is that this is to bring these individuals into line with UK domiciled individuals and comes into effect from 6 April 2017. For close companies (broadly those owned by 5 or fewer shareholders) owning UK residential property the tax charge will reflect the value of the shareholding, rather than the underlying property, so minority shareholdings may benefit from a discount. Partners in partnerships will be treated as if they own UK residential property directly rather than an interest in the partnership. Where residential property owned personally has been gifted to a trust this may now in some circumstances result in inheritance tax charges for both the trust and the individual.
Despite representations the government has not provided a window for de-enveloping such property owning structures. Consequently, individuals wishing to reorganise their property owning structures may realise CGT or Stamp Duty Land Tax charges when doing so. Property owning structures currently paying the Annual Tax on Enveloped Dwellings (ATED) will therefore no longer provide IHT protection so consideration should be given to de-enveloping these structures, if IHT was the main motivator, as the ATED charge will continue to be due.
In addition, if a partnership or a close company sells its interest in a UK residential property, then the cash proceeds will continue to be subject to IHT for a further two year period.
Finally, in changes previously unannounced, if funds are loaned to a structure in order to acquire or enhance a UK residential property directly or indirectly, then the lender will also be subject to IHT in the same way as if the property was held by them directly. In some cases this could lead to a double charge to inheritance tax on the same property.
It is therefore important for all structures holding UK residential property to be reviewed in order to assess the impact of these changes and the tax cost of removing the property from the structure.
To download a copy of this article, click here.
This article has been written for the general interest of our clients and contacts to stimulate further thought and enquiry. It does not contain answers to specific situations and it is therefore essential to treat it as a prompt to take specific advice on any real and particular issues. We believe that the facts as summarised in this article are correct as at the time of going to press in December 2016. If we discover that the newsletter might be read in a way that conveys a misleading impression (whether by tone, content, error or omission) we will make the necessary changes and draw attention to what has been changed once we become aware of the need to do so. We will not be responsible for any action taken by a reader who relies on the newsletter but does not seek further advice to answer any specific query. Frank Hirth Plc©