Typically, well-advised foreign investors would use structures – trusts and offshore companies (SPV/PIC) – to reduce their exposure to taxes. However, recent tax changes by HMRC mean that this is no longer the case.
The UK government sought to increase the taxes on UK property held through structures by introducing a raft of anti-avoidance measures aimed at situs assets held indirectly, that is, through an offshore structure.
Similarly, in the wake of Panama/Paradise/Pandora Papers, the privacy these structures used to afford is no longer the case, and governments can see through them to the ultimate beneficial owner (UBO).
London remains the clear favourite for the UK property sector.Regarding UK residential property, these structures are no longer effective in insulating the investor from tax.
As a result, foreign investors are liable to inheritance tax at 40 per cent on death regardless of the holding structure. HMRC is quite unequivocal in that this must be paid in cash within six months before the asset can be passed on to the family/estate.
Moreover, the assets cannot be sold to meet this liability and if this deadline is not met, HMRC reserves the right to fire sale or, in some cases, confiscate altogether.
If we consider the size of the problem, a report showed that close to half (44 per cent) of all UK properties owned by overseas structures are located in London. More than one in 10 (11,500) properties owned this way are located in the City of Westminster, and more than 6,000 properties owned by offshore structures are in the London Borough of Kensington and Chelsea.
The most common jurisdictions for foreign company ownership of UK property are, according to Land Registry and BBC analysis in 2018: the British Virgin Islands, Jersey, Guernsey and Isle of Man, in that order.
The BVI has traditionally been the most popular due to ease of establishment, flexibility and moderate costs. Most legal advisers and fiduciary agents prefer the BVI for this reason.
London remains the clear favourite for the UK property sector, as expected and has been for many years, with the value of properties owned overseas in 2018 reaching £33.9bn.
IHT planning has remained a planning conundrum for British domiciles, so what chance do foreign domiciles have?It continues to grab headlines with many high-profile purchases from foreign investors and is destined to continue. There is a heavy concentration of property in London (Zone 1) owned by offshore structures.
The new anti-avoidance rules have severely limited tax planning options for non-UK domiciled individuals, whether UK resident or non-resident, in respect of UK residential property. Foreign investors need to be aware of this new legislation and its impact on their residential property portfolio.
IHT planning has remained a planning conundrum for British domiciles, so what chance do foreign domiciles (and their advisers) have?
With the nil rate band (£325,000) static since 2009 and not likely to change until 2026, many UK domiciles have been sleepwalking into an IHT trap. Last year alone, HMRC increased their IHT haul by more than 20 per cent, and this is set to steadily rise in the advent of their ability to spread their net wider.
The planning options have been simplified in that the client either sells the asset, gifts using the seven-year rule or deploys a liquidity solution to meet the liability.
Clearly, a blend of onshore and offshore advisory is needed.For the foreign investor, the ability to exercise the third option is very difficult since underwriters in the UK are reticent to accept this profile of client.
As a result, foreign investors, who may seek their advisory in the UK, may have to look overseas to find the right liquidity solution that meets their needs and mitigates this hefty tax bill. The challenge for non-resident non-domiciled to plan effectively is clearly an uphill task.
In light of this new legislation, IHT planning has taken on a whole new dynamic, and traditional methods and legacy structures need to be reviewed/revised if they are to be effective.
If the challenge was not hard enough for British domiciles, it is even more complex for foreign investors, most of whom are unaware of their exposure or the options open to them. Clearly, a blend of onshore and offshore advisory is needed if value can be delivered to foreign owners who, at the end of the day, own billions of pounds of UK property.
Tim Searle is chairman of Globaleye
