Inheritance tax changes for offshore entities holding UK residential property

28 September 2016

What’s the issue?

The Government has recently published a consultation on further reforms to the taxation of non-domiciles, one of the main changes being, that from April 2017 residential property in the UK held by non-UK companies, will be subject to inheritance tax.

Following the Brexit vote it was thought by many that the reforms would be postponed, but it’s now clear the Government is keen to push ahead with the changes, although many important details will not be available until the publication of the draft Finance Bill in 2017.

What is the current position?

It has been standard practice for non-domiciled individuals to carry out a process of ‘enveloping’ their UK residential property by holding it through an overseas company or similar structure. This resulted in the non-domiciled individual owning overseas shares which were not part of their UK estate for inheritance tax purposes.

How will this change?

From 6 April 2017, the Government plans to bring residential properties in the UK into the inheritance tax charge where they are held by an overseas structure, such as a company or a trust. 

Both individual shareholders and trustee shareholders will be affected, under different rules. Properties that are let to tenants will also be caught.

What will trigger a charge for inheritance tax?

All chargeable events that take place after 5 April 2017 will trigger an inheritance tax charge and the definition of a chargeable event will follow the existing inheritance tax rules. So, this will include:

• the death of an individual holding shares in an overseas close company which owns UK residential property;
  
• the redistribution of the share capital of an overseas close company which owns UK residential property;
• the death of a donor making a gift of shares in a close company which owns UK residential property where that gift was made within 7 years of death;
• a gift made by a non-domiciled individual of shares in a close company owning UK residential property;
• the death of a donor or settlor who benefits from a gift of UK residential property or of shares in a close company which owned such property within 7 years of death;
• any ten-year anniversary of a trust holding UK property through an offshore company;
• the death of a life tenant with a pre-March 2006 qualifying interest in possession in a trust from which they have an entitlement to income.

Currently, where a UK property is owned directly by an individual or trust, a tax return is required whenever a chargeable event occurs and the individual, trustees or beneficiaries of an estate are liable for paying the tax. 

This will remain the same for chargeable events that arise through enveloped structures, however this raises the issue of HMRC being able to identify whether or not a chargeable event has taken place.

To try and combat this HMRC is likely to have extended powers to impose a tax charge on the property directly and to prevent it from being sold until any outstanding tax charge has been paid. 

In addition, there will be a new liability imposed on any person who has legal ownership of the property, this will include the directors of a company which holds property. This will help ensure that inheritance tax is paid, though only when HMRC are aware that a charge has arisen and have taken steps to collect the liability.

Is there going to be any incentive for ‘de-enveloping’ a property?

The Government has stated that whilst it would like to encourage de-enveloping, it is not going to provide any incentive to do so. So any tax charges that would normally arise from a transfer of a property will still be payable.

If you would like to discuss this topic in more detail, please contact Partner, Jane Molyneaux. 

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.