As Finance Director, I’m often asked how landlords and property investors are taxed when acquiring UK residential property. This month, I answer your questions about UK inheritance tax changes for non-UK domiciled and offshore companies.
Benjamin Franklin wrote in 1789 that nothing in this world is certain except death and taxes. It was an ominous thing for someone responsible for setting the US constitution to write because it shows that whether we like it or not, government policy has a hold on our finances and our lives.
This year, inheritance tax changes have affected UK residential property when held indirectly through an offshore company or a trust.
What is the scope of the changes to UK Inheritance Tax law?
From 6 April this year, UK residential property owned through non-UK structures has been subject to inheritance tax (IHT) whether the owner is UK resident or not. And this includes any interests in the property; so the mortgage or loan used to fund it will not escape IHT.
The change follows some pretty significant moves to tax offshore structures; the annual tax on enveloped dwellings (ATED) was followed up with the annual tax on enveloped dwellings capital gains tax (ATED CGT) and non-resident capital gains tax (NRCGT). Unsurprising really that inheritance tax should increase its reach overseas too.
So what can be done about it?
Some will now consider de-enveloping i.e. transferring the property out of the company structure and into the owners individual names. This will be particularly relevant to those that are not renting their property out on commercial terms and are therefore subject to ATED as by doing so those charges will no longer be payable. However there will be exit charges and particular attention needs to be paid on any potential CGT or stamp duty consequences.
For properties held in an off shore trust structure, de-enveloping will shield the beneficiaries from the full 40% IHT on the value of the whole property on the death of the owner. However, the trust will now be liable for ten-year anniversary charges of 6% of the value of the property above the nil-rate band tax which is currently £325,000.
It may be of small consolation but by removing the ‘company’ status it removes the expensive annual maintenance charges that companies face.
Selling the property and moving the funds offshore is always an option but there is still a two-year tail period which means that if the owner passes away in that time then the funds are liable for IHT. And the sale will be liable for NRCGT anyway.
But I paid the ATED, am I not protected from the UK inheritance tax changes?
Sadly not. The only way to protect yourself from IHT is to gift the shares to any non-UK domiciled children then the IHT will least skip a generation.
Franklin was right, you cannot avoid taxes anymore than you can avoid death, but you can at least try to make both less painful
Please note that Benham & Reeves Lettings do not act as tax consultants and that anyone concerned about what is best for their particular circumstances should seek professional financial advice.
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