Investment in the UK's property sector - particularly high value London residential property - remains attractive to non-UK domiciliaries.  Historically, such properties have often been held through an overseas company either directly owned by non-domiciled individuals or indirectly owned through offshore trusts for a number of reasons including confidentiality, succession planning, asset protection and inheritance tax (IHT) mitigation. 

An individual who is non-UK domiciled (and not 'deemed' domiciled because he/she has been resident in the UK for 17 out of the last 20 years) will only be subject to IHT on his UK assets.  If UK property is held through an offshore company then he/she is not treated as owning a UK asset but rather owning shares in an offshore company.  In this way, IHT on the UK property is avoided.

In recent years, the UK Government has introduced a raft of measures to discourage this type of ownership and encourage the transfer of properties out of offshore companies - known as 'de-enveloping'.  Such measures include the 'ATED' charge (Annual Tax on Enveloped Dwellings) and an enhanced Stamp Duty rate.  Nonetheless, many have chosen to retain their property structure often because of the IHT benefits.

The Government announced in the Summer 2015 Budget:

"From April 2017 the government will also introduce new rules so that everybody who owns residential property in the UK and would otherwise pay inheritance tax on that property cannot avoid paying it by holding it in an offshore structure."

All of these property holding structures (whether the property is let or not and regardless of its value) should now be reviewed as to whether they should be retained after April 2017 or 'de-enveloped'.  Our advice is to start considering the structures now but not to do anything just yet.  In its technical briefing of 8 July 2015, HMRC acknowledged the potential charges on de-enveloping, saying:

"If the property is mortgaged or has increased significantly in value since 2013 there may however, be significant costs in de-enveloping.  The government will consider the costs associated with de-enveloping….during the course of the consultation regarding de-enveloping"

The industry is expecting some form of a tax relief to be introduced and available until 6 April 2017 relating to capital gains tax and/or stamp duty to mitigate the tax charges that may be triggered on a de-enveloping exercise.  We should know more in early 2016.

So, for now the message is: be aware but do nothing yet: watch this space!

This article first appeared in Prime Resi in November 2015 and was written by Kate Rees-Doherty, an Associate in the Private Client & Tax department.