Owners of UK residential property who live overseas have had to deal with a number of tax changes in recent years, the most well-known of which is the Annual Tax on Enveloped Dwellings ('ATED') which was introduced in 2013.
A further change is likely to take place shortly which is arguably of even greater significance. The UK government intends to legislate in Finance (No. 2) Act 2017 so as to bring all UK residential property within the scope of UK inheritance tax ('IHT') regardless of value and regardless of whether the property is held in a corporate entity. Until now, such property fell outside the scope of IHT provided the company was created by a person who is not a long term UK resident and not UK domiciled. The legislation regards the value of the UK property as being reflected in the value of the shares or securities of the company, and levies an IHT charge on those shares or securities to the extent of that value.
There may be ways to mitigate the effect of the new rules if UK property has been acquired using borrowed funds. This is only likely to apply however to the extent funds are borrowed from a commercial lender to fund the initial acquisition of the property. There are a number of anti-avoidance rules that can otherwise apply. For example, under the new rules, a loan provided to enable someone to acquire UK residential property can be treated as though it were an interest in UK residential property, so that the value of the loan is then within the scope of UK IHT.
IHT can potentially be avoided if the property is sold, if the proceeds of sale are then kept outside the UK. However, the proceeds of sale do not fall outside the scope of IHT until a further two years have passed. Likewise, if a loan falls within the scope of IHT for the reason referred to above, it will remain within the scope of IHT for two years after it has been repaid.
Assuming the new rules are enacted they are due to be backdated to 6 April 2017. Because of the rules referred to above, any restructuring is likely to have effect only after a further two years have passed and so it is essential that anyone who is potentially affected by this change takes advice soon. This is especially true if the shares or securities of the UK property holding company are held in trust. Some trusts are subject to an IHT charge at ten-yearly intervals and if an IHT charge is due to fall in 2020 or 2021 it will soon be too late to take steps to avoid imposition of the charge.
For some overseas owners of UK residential property, the latest change may be the final push needed to persuade them to collapse the company that owns the property, since doing so will avoid the need to pay ATED charges in future. Collapsing the company may give rise to a charge to capital gains tax but generally this charge will only apply to the gain made since 5 April 2013 (or later for some properties). Accordingly, there may be an opportunity to collapse the company without a prohibitive charge to capital gains tax, if a decision about this can be taken without delay. A charge to stamp duty land tax may arise in some cases, particularly if there are debts charged against the property, but there may be ways in which that can be mitigated.
Before making a final decision we recommend that full advice be obtained based on your individual circumstances.
Our Private Capital team delivers specialist guidance across all private client and tax areas. Acting for high-net worth individuals and business owners across the regions, nationally and internationally, the majority of our team members are STEP qualified and hold appropriate tax qualifications.