New tax rules in April 2017 will herald a change to the way UK residential property is taxed for those who are not domiciled in the UK.
An individual is subject to inheritance tax on their assets worldwide if they are domiciled in the UK. An individual is domiciled in the UK either by the facts of their situation, or if they have been resident in the UK for more than 17 out of the last 20 tax years.
If an individual is not domiciled in the UK, inheritance tax will generally only apply to the value of their UK assets. For many years, clients who are non-UK domiciled have held their UK residential properties in offshore companies. This has traditionally meant that instead of owning UK real estate (that would be subject to inheritance tax on their death), they would own the shares of the offshore company which is excluded from UK inheritance tax.
The new rules – residential property now caught by inheritance tax
From 6 April 2017, offshore companies holding UK residential properties will no longer be treated as "excluded property" for inheritance tax. That means the UK residential property they own will be subject to inheritance tax at 40% on their death, regardless of whether the property was held by a company or not. HM Revenue & Customs are also currently considering making company directors liable for a failure to pay inheritance tax.
Until now, a loan taken out to purchase a UK residential property could reduce the net value of the asset subject to inheritance tax. However, restrictions on the deductibility of such loans from connected parties for inheritance tax will also be introduced in 2017.
Properties owned by companies may also be subject to ATED (the annual tax on "enveloped" dwellings). However, rental profits from properties owned by companies are subject to tax at 20%, compared to a personal income tax rate of up to 45%.
Therefore all tax and non-tax factors should be considered carefully when deciding the best property ownership structure going forward.
Timetable – April 2017
The changes are coming into force in early April 2017 and many company structures will become redundant when they do - so winding up such structures should be considered. The analysis could be complex, and it often takes time to liquidate a company therefore clients are encouraged to get advice early.