In addition to these taxes, the UK government now charges IHT on the death of an individual who holds shares in a company that owns a UK residential property. The value used for IHT is the value of the shares that represent the underlying property.
Some people even take corporate ownership a stage further – they use trusts to hold the shares in the overseas company which owns the UK property. Where such a structure exists the shares that represent the value of the UK property will not be excluded and potentially be subject to UK tax.
These taxes and the costs associated with holding a property in a trust and corporate structure can now be unattractive and many now consider owning the property personally. This means they need to find alternative ways of meeting the inheritance tax liability.
The easiest and most straightforward method is to insure the potential inheritance tax liability.
Take our example above: a property worth £5m owned by the non-resident, non-UK domiciled individual. They could insure their life for £1.8m with a policy designed to pay out to their family when they die. An insurance company would then provide a lump sum on death to cover the potential IHT liability. The cost of cover could vary depending on state of health, lifestyle, country of residence and so on, but could be significantly cheaper than the various taxes and fees associated with more complex and convoluted ways of owning a property. It would also be much easier to explain to the family members.
The use of a suitable trust could make sure that the sum assured is paid out quickly and without any unnecessary taxes, but this would depend on the policyholder’s country of residence.
For those people not resident in the UK, or those who opt to use the remittance basis, the use of a non-UK insurer may be attractive. If the individual has sufficient foreign assets to justify the remittance basis charge, then they can fund any policy using unremitted funds. If the sum assured became payable and was brought to the UK there could appear to be a remittance, in which case the derived remittance would equal the premiums paid to the extent they had been paid from foreign income and gains.
As the remittance basis user would have died prior to the remittance being made, there is a question as to who would have to pay any tax, especially if the sum assured was remitted in the tax year following the death. Looking at HMRC’s Residence, Domicile and Remittance Basis Manual, section RDRM33600 states that, ‘Foreign Income and Foreign Chargeable Gains of a remittance basis user that arose or accrued before his or her death but which are brought to the UK after the date of his or her death will generally not be regarded as a taxable remittance.’ On this basis, the lump sum may not be taxed when being remitted anyway; it is important to clarify the tax position when considering any remittance to the UK.
