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”.
A relevant loan is one that has been used by a trust, partnership or individual to acquire, maintain or enhance UK residential property or any non-excluded property (i.e. a company or partnership that holds any such residential property).
This definition of relevant loans is far reaching. It means that the lender (who will not necessarily be aware of their new status) will now hold non-excluded property and will therefore be exposed to IHT.
The owner of the UK residential property itself (whether it is held outright or through some type of structure), on the other hand, may still be able to mitigate their exposure to IHT, for example by taking out life insurance.
Whether or not this will make the cut in the final legislation remains to be seen. Nevertheless, a huge number of lending arrangements in connection with UK residential property will need to be reviewed before the new rules come into force on 6 April 2017.
From that date onwards, there will be IHT implications for an individual if he or she dies holding a relevant loan, and for a trust if a ten-year anniversary occurs while the trust holds such a loan (and, if the trust has a living settlor, perhaps also in the event of the settlor’s death).
Even more worryingly, the non-excluded property concept extends, in the new draft legislation, to “money or money’s worth held or otherwise made available as security, collateral or guarantee for a relevant loan”.