How to preserve the value of your enveloped property

With HMRC increasing its revenue from tax avoidance investigations, Thomas Adcock suggests looking at traditional tax planning methods instead for UK property held through offshore companies

HMRC saw its additional revenue jump 80 per cent from 2015 to 2016 through investigations into tax avoidance. With tackling tax-dodging schemes a current priority for HMRC, recent changes to the UK inheritance tax regime will have implications for foreign domiciles buying, holding or selling UK residential property through offshore structures.

From 5 April, UK residential property held through offshore structures will be brought within the scope of UK inheritance tax. For this to happen, the value of structures that derive from UK residential property will be removed from the definition of ‘excluded property’ unless the interest held is less than 1 per cent. Importantly, the proceeds from the disposal of a UK residential property will remain outside the definition of ‘excluded property’ for two years after the disposal.

In light of the new rules, now is the time for foreign domiciles – those who own or have an interest in UK property held by an offshore entity – to reconsider their arrangements and opt for traditional tax planning instead of falling for tax avoidance scams.

So what are the options? Investors may choose to do nothing. However inactivity would come at a cost: on the death of the beneficial owner they will be assessable to UK inheritance tax at 40 per cent of the net value of their share in the UK residential property over and above the person’s £325,000 nil rate band.

A second option is to reduce the net value of the UK residential property by securing third party debt against the asset. The net value of the asset will reduce as a result, and the amount of UK inheritance tax payable on death will in most cases decrease.

Of course it’s also an option to sell the shares or the property. While this will ultimately be effective from a UK inheritance tax point of view, it should be noted that if the sale occurs after 5 April the proceeds will remain within the scope of UK inheritance tax for two years. And it hardly needs pointing out that the disposal is likely to attract other UK tax to boot.

There are two other possible courses of action. The first is to gift the shares to the next generation. If this occurs before 5 April there will be no UK tax consequence of the gift if the donor is not domiciled (or deemed domiciled) in the UK at the time. After this date, the assets may remain part of the donor’s estate for seven years.

Finally, it might be worth considering transferring the shares in the non-resident company into trust before 5 April. Whilst trusts are subject to UK inheritance tax, they operate under different rules. A trust pays tax at just 6 per cent on every tenth anniversary and proportionately when money is distributed from the trust. If the transfer does not take place until after 5 April an IHT charge of 20 per cent of the value of the assets – again, less the available nil rate band –will arise on the transfer. This lower rate is potentially an attractive solution. However, one should not proceed down this route without having considered gift with reservation of benefit (GROB) rules.

Thomas Adcock is a partner at Carter Backer Winter



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