Individuals who are domiciled (or deemed to be domiciled) in the UK are subject to inheritance tax (IHT) on their worldwide assets. In contrast, ‘non-doms’ are only subject to IHT on assets they own which are situated in the UK. Foreign assets are excluded from the scope of IHT (excluded property).
Where UK residential property is held directly by a non-dom individual it is subject to IHT at 40% subject to reliefs. If the non-dom individual holds shares in an offshore company which holds the UK property (‘enveloping’), there is no IHT charged on death because the ‘non-dom’ holds non-UK property – the shares in the offshore company.
Similarly, offshore trusts are subject to UK IHT on holdings of UK property but may avoid such charges by enveloping the property into an offshore company.
With effect from 6 April 2017 the Government intends to amend the IHT rules so that non domiciled individuals or offshore trusts owning UK residential property through an offshore company, partnership or other opaque vehicle will pay IHT on the value of that property. This will be achieved by the shares of offshore companies or similar structures no longer being treated as excluded property to the extent that they derive their value directly or indirectly from UK residential property.
Where the company holds a number of assets, only the value of the residential property should be subject to tax. A deduction should be available for borrowings taken out to purchase the UK property and the spousal exemption and other reliefs may also apply.
The rules will only apply to UK residential property and not to UK commercial property or other UK assets. A special exemption will apply to diversely held vehicles that hold UK residential property.
The government will consult on the implementation of the proposals and further details will be provided in the consultation.
This is the latest line of attack on the holding of UK residential property through offshore corporate structures. The rules follow the introduction of the ATED rules in April 2013 and the non-resident CGT charge in April 2015. Like the ATED rules, the intention of these new rules is to encourage the de-enveloping of UK property.
The ATED rules in this respect were largely unsuccessful. Many retained corporate holdings of UK property because of the IHT benefits and the tax costs associated with de-enveloping. It is intended that the new rules will remove such IHT advantages. The government has also indicated that they will consider the costs associated with de-enveloping during the course of the consultation. As a result it is expected that many corporate structures will de-envelope UK residential property in the coming months.