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A simple solution to the problem of international IHT

London is seen by many as one of the leading cities in the world and many wealthy non-UK residents have bought residential property in London, or maybe somewhere else in the UK. Property prices in the south east of England, and especially London, can make owning a residential property a lucrative exercise.

Buyers purchase London property for three main reasons: as a buy-to-let investment; to accommodate family members such as students or returning expats, or as a London base for work or holidays. It has been suggested that more than 70% are for investments to rent.

Recent figures also show that a third of new homes in the prime central London boroughs of Westminster, Kensington and Chelsea and the City were also sold abroad.

As the owners may not be resident in the UK they may not appreciate the impact of UK inheritance tax that could be payable. Individuals who own UK property will be liable to UK inheritance tax even if they are non-UK resident and non-UK domiciled.

Inheritance tax in the UK is mainly linked to domicile and a non-UK domicile will pay UK inheritance tax on any immoveable assets based in the UK. This, by definition, will include any UK property. If these individuals become UK resident then once resident in the UK for 15 out of the previous 20 tax years they will be deemed UK domiciled and be taxed in the same way a UK-domicile – they will pay UK inheritance tax on their worldwide assets.

As you can see from this, wealthy individuals who own a property in the UK, even if they do not become ‘deemed UK domiciled’, could leave a significant tax liability to their family should they die whilst owning a UK property.

In the UK everyone is entitled to a nil rate band of £325,000 and a residence nil rate band of (currently) £125,000.  After this everything is taxed at 40%, unless they give away at least 10% of their net estate to charity, in which case they would benefit from a reduced rate of 36%.

Using the 40% rate, consider an individual who owns a property in London that is valued at £5m. On their death they would potentially leave an inheritance tax liability of over £1.8m and this would need to be paid before the assets can be passed on to the heirs.

In the past, in an attempt to avoid the potential for inheritance tax, many non-UK domiciles created an overseas company to buy the property as IHT was not charged on assets held in overseas corporate structures. As well as the fees for putting such a structure together, over recent years the UK government has made ownership of property in this way much more onerous and expensive, so much so that the use of overseas companies may not be the best way forward.

The measures taken by the UK government mean that company-owned properties can suffer higher rates of Stamp Duty than personal ownership, the Annual Tax on Enveloped Dwellings (ATED) may be payable and ATED-related Capital Gains Tax (AR CGT) could apply.