November, 2020

This article was contributed by Jason Pearce, Head of Technical Sales, Hong Kong & NE Asia for Quilter International. 

There have been over 20 changes to the taxation of UK property in the last 8 years, the vast majority being increases. A further surcharge of 2% on Stamp Duty Land Tax (SDLT) for overseas buyers is coming on 1 April 2021, so that the highest rate of SDLT will be 17%, on properties valued over £1.5 million.

Perhaps the most far-reaching change has been to the inheritance tax (IHT) treatment of properties that are owned by non-UK companies, of which there were nearly 100,000 as of January 2018*. Prior to April 2017, if the owner of the non-UK company was not UK domiciled, then upon their death there would be no IHT due on the property, as it was “enveloped” in an offshore structure. The term that HMRC use for such structures is excluded property.

From 6 April 2017, such structures are no longer excluded property – the value of a non-UK company that is attributable to a UK residential property is subject to IHT on the death of the owner, even though they are non-domiciled. HMRC give examples of this on their website**.

Owners of non-UK companies holding UK property therefore have, since April 2017, a potential IHT liability that did not exist before. Can anything be done to mitigate this?

It might be thought that the company could raise a mortgage against the property, and move/keep the money outside the UK, so that only the equity portion of the property’s value is subject to IHT. Unfortunately, tax changes made in July 2013 mean that this strategy will not work, although if the property was initially bought with a mortgage (which has not been subsequently increased), then in this case only the equity is taxable.

The simplest and safest way to deal with the IHT is to arrange a life assurance policy which will pay out upon the death of the person whose decease will trigger the IHT. This assumes the person is insurable, and that the premiums are not prohibitive. If you would like to know more, please speak to your financial adviser/insurance broker.

For more information and assistance, please contact us at intray@zetland.biz..

* https://www.step.org/industry-news/nearly-100000-properties-england-and-wales-owned-foreign-entities

** https://www.gov.uk/guidance/enveloped-uk-dwellings-and-related-finance