The UK Government has dealt yet another blow to the ownership of UK residential property through corporate structures.
Essentially, this means that after 5 April 2017 these types of structures will now fall within the scope of UK inheritance tax (IHT).
Until now, ownership of UK residential property through non-UK companies has been relatively standard IHT planning for many non-doms (i.e. individuals who are not domiciled in the UK nor deemed domiciled for IHT purposes) and trusts established by them.
Bringing these structures within the scope of IHT is a significant change to the current position and one that is certainly proving to be challenging for advisers and wealth managers, across many fronts.
Advisers have been considering the impact of these new rules for some months now and, unfortunately, there is still some uncertainty in areas.
Although the legislation has only just been finalised, with the Finance Bill coming out at the end of March, it is necessary to carry out a full review of these structures as soon as possible, as in some cases action will be required before 6 April 2017.
Any structures in place which have not yet been reviewed will now need urgent attention.
Summary of the draft proposals
The government’s intention is to create a new category of property for the purposes of the UK IHT regime: non-UK property which is “non-excluded”.
Under current law, foreign assets of a non-dom, or of a trust created by such an individual, are “excluded property” for IHT purposes and, as such, are outside the scope of IHT. Shares in a non-UK company, for example, are currently excluded property and therefore outside the scope of IHT.
From 6 April in some cases (as described below) they will not be excluded property any longer and could be subject to IHT at 40 per cent on the death of the owner or, if they are held in trust, subject to a different charging regime, which is in some ways even more complicated.
In accordance with the new legislation which will take effect from 6 April 2017, certain assets that are currently excluded property (because they are non-UK situated) will fall within the new category of non-excluded property, and will be within the scope of IHT.
The aim of the new rules is to prevent non-doms benefiting from structures and arrangements which, under current law, can be used to reduce or eliminate their exposure to IHT where a UK residential property has been acquired.
Government policy here is not to differentiate between a residential property purchased for use by the non-domiciled individual, and such a property purchased for commercial letting to third parties. In both cases, avenues for IHT mitigation are to be blocked.
The draft legislation provides for various classes of foreign assets in the newly created category of non-excluded property: shares or other interests in closely held non-UK companies that derive their value from UK residential property; interests in non-UK partnerships that derive their value in the same way; and “relevant loans” (more on which later).