Who should read this?
People holding or lenders financing UK residential property that is held through certain non-UK structures.
Summary of proposal
From 6 April 2017 UK residential property owned through certain non-UK structures will be brought within the charge to UK inheritance tax (IHT) regardless of the residence and domicile status of the ultimate owner. Any debt used to finance such property will itself be subject to IHT in the lender’s hands.
Key changes from the draft legislation
The draft legislation contains the following changes to previous versions:
- Where the UK residential property is held by a non-UK close company or partnership indirectly via underlying companies and/or a partnership, interests whose value is less than 5% of the total value of the underlying company or partnership will be disregarded and the chain of indirect ownership broken. The previous legislation contained a 1% de minimis. This change was pre-announced in the Spring Budget on 8 March 2017.
- The extent to which the value of assets given as security or collateral for a loan used to finance UK residential property will be subject to IHT is capped at the value of the loan.
- Clarification that a loan will cease to be subject to IHT in the hands of the lender if and when the UK residential property interest (whose acquisition, maintenance or enhancement in value the loan financed) is disposed of.
- Where the two year tail applies, the amount of value potentially subject to IHT will be capped at the value of the consideration at the time of disposal or loan repayment.
- There is a new tracing provision which confirms that, where a loan is initially made (by lender A) to acquire any property (for example an investment portfolio) which is subsequently sold and the sale proceeds are used to acquire a UK residential property interest or to make/repay a loan to purchase the same, the debt owed to lender A will be within the scope of IHT.
- In the event that a liability to IHT (plus any interest due) under the new rules remains unpaid, a charge will be imposed in favour of HMRC (the UK tax authority) on the UK residential property.
6 April 2017
We understand and support the Government’s aim to ensure parity of all UK residential property owners in terms of their exposure to IHT. However, the rules are widely drawn, encompass what previously appeared to be accepted planning. It is a shame that the opportunity was not taken to help people simplify complex property ownership structures.
For further information see:
UK residential property
Big changes for non doms
Mike Walker +44 (0)20 7311 8620
Rob Luty +44 (0)161 246 4608