Justine Howard, Senior Tax Manager at KPMG Isle of Man, considers the impact of the decision to remove various clauses including new inheritance tax rules on indirectly held UK residential property from what is now the Finance Act 2017.
In the wake of the announcement of the General Election, various clauses were withdrawn from what is now the Finance Act 2017 on 25 April 2017 and which were due to come into effect from 6 April 2017 including the new inheritance tax rules on indirectly held UK residential property. There is now uncertainty as to whether the new rules will be brought into effect by the next government in the form we had anticipated and, if they are, whether the effective start date will be 6 April 2017, 6 April 2018 or potentially some date in between.
Timing is however not the only uncertainty individuals are facing. As a result of the snap decision to drop the clause seeking to charge inheritance tax on UK residential property owned through certain offshore structures, there are a number of very real and current issues facing those with UK residential property held in this way including:
1. If a non-UK domiciliary (“non-dom”) dies today holding shares in a non-UK company which owns UK residential property, is there an IHT charge on the company shares? Do his personal representatives need to file an inheritance tax return?
2. If there is a 10 year anniversary of a trust settled by a non-dom, which owns a non-UK company which holds UK residential property, is there an IHT charge? Does is make a difference if the date of the 10 year charge occurred before or after the announcement on 25 April 2017 that the clauses were to be dropped?
3. Can trustees of a trust settled by a non-dom transfer shares in a non-UK company, which holds UK residential property, out of the trust without incurring an inheritance tax charge?
4. Have settlors already been unnecessarily excluded from benefiting from an offshore trust and company structure which holds UK residential property to avoid the property being included in their estate on death under the gift with reservation rules. Can this now be reversed with no adverse tax consequences?
During the Parliamentary debate on the Bill Jane Ellison, Financial Secretary to the Treasury, confirmed that there has been no policy change and that the omitted clauses will be re-introduced as soon as possible should the Conservatives form the next Government. While this was a clear statement that there had been no policy change at that time, we cannot be certain that after the election the position will remain unchanged, in particular in relation to the commencement date for the legislation. Also, if there is a change in Government following the election then the comments made by the current Financial Secretary can no longer be relied upon.
The best advice must therefore surely be to wait until the technical position becomes clearer.