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).
In addition, the government has included, within the concept of non-excluded property, certain sale proceeds and loan repayments, for a two-year period running from the date of the sale or repayment – known as the “two year tail”.
For example, the proceeds of sale of shares in a non-UK company which owns UK residential property will, according to the draft legislation, be non-excluded property for a two year period running from the date of the sale.
Similarly, if such a company makes a loan repayment, the sum received will be non-excluded property for two years from the date of the repayment.
Under the incoming legislation, this two year tail will not apply to the proceeds of sale of directly-held UK residential property (i.e. property held directly by an individual); nor does it appear to apply to non-excluded property held in trusts (more on which below).
This aspect of the legislation is problematic in various ways. For example:
- Where sale proceeds / loan repayments are personally held, they will continue to be treated as non-excluded property for two years. Enforcement or compliance may be an issue. Imagine, for example, non-UK executors dealing with the estate of a non-UK resident and non-UK domiciled person who died without any UK assets. There is no link to the UK: it is implausible to think that the executors will have even heard of the new rules relating to sale proceeds, let alone know whether various non-UK assets are derived from the sale proceeds of the shares in a non-UK company that has been sold within the last two years.
- Where sale proceeds or loan repayments are held in trust, the draft provisions are meant to trigger an IHT liability if the sale proceeds or loan repayments, or assets derived from them, are distributed out of the trust. The draft legislation currently states there is no two year tail here.
Loans and collateral
As mentioned above, the new category of non-excluded property now expressly includes “relevant loans”.
