From 6 April 2017, all non-UK domiciled individuals (non-doms) holding UK residential property through an overseas company in which they hold the shares or beneficial interest will become subject to UK inheritance tax (IHT) at 40% of the value of the UK property on their death.
The new legislation is being introduced as part of a package of measures brought in since 2012 that has been specifically designed to make it less attractive to hold high-value UK residential property indirectly – through a company or other structure, often termed as a non-natural person (NNP).
Previous measures included in the anti-avoidance package relating to indirectly owned UK residential property have included:
- A higher 15% rate of stamp duty land tax (SDLT) on the acquisition of high-value UK residential property by NNPs;
- An annual tax on enveloped dwellings (ATED) – an annual tax charged on NNPs that own UK residential property valued at more than £500,000; and
- A capital gains tax (CGT) charge on sales by both by both resident and non-resident NNPs of UK residential property falling within the scope of ATED.
Despite these measures, many non-doms have continued to hold UK property through an overseas structure because it meant the property was not subject to UK IHT. This will no longer be the case.
Impact of the new measure
From 6 April 2017, all non-doms holding UK residential property through an overseas company in which they hold the shares or beneficial interest will become subject to IHT at 40% on the value of the UK property on their death. The company structure will effectively become “transparent” for tax purposes and the owners will be taxed directly.
It does not matter if the company shares are held within an overseas trust or foundation. The property will be treated as belonging to the settlor or founder on death in most cases.
Property held directly by overseas trusts will also be affected in cases where the IHT charge has been reduced by debt. This debt will be subject to IHT from 6 April 2017.
Options for non-doms
It may be that a non-dom with an investment property held in an overseas company may wish to retain the property in the company envelope in order to benefit from the lower rate of corporate income tax on the rental income and the more generous deductible expenses that are available to companies.
However there are various re-structuring options for the company shares that, if executed before April, will mitigate the impact of the new measures. Options include gifting the shares to children or using the shares to purchase a pension scheme.
For trust arrangements that are affected by the new rules, a straightforward option would be to exclude the settlor as a beneficiary before 6 April 2017. This should ensure that the trust assets remain outside of UK IHT. However the trust is likely to still be subject to a maximum charge of 6% every ten years, at least while the UK property remains held in the trust.
Further mitigation planning can be achieved by ring fencing the asset(s) that will be subject to IHT in a single trust and excluding the settlor from that trust only, allowing free use of all other assets held in the other trusts that the settlor may have settled.
Planning options still also exist for new property purchases – both investment properties and properties for residential use.
Sovereign is able to provide strategic planning and advice on restructuring or “de-enveloping” existing arrangements. We can also set up and manage new structures or takeover old structures that require restructuring. Please contact your nearest office as soon as possible for a free consultation. The time to act is now.