Exposure to UK inheritance tax
Taking out mortgages
Life insurance
Wills


When acquiring UK property, aside from seeking legal support on conveyancing, purchasers should seek advice on the broader tax and legal implications. As with any substantial acquisition or investment, there will always be potential pitfalls. Taking advice from the outset will enable proactive planning and help to avoid costly future challenges.(1)

Exposure to UK inheritance tax

The acquisition of UK real estate by a non-UK domiciliary will always come with an increased exposure to UK inheritance tax (IHT). The value of UK property in a person's estate will be subject to IHT at a flat rate of 40% on death if and to the extent that it exceeds the deceased's available nil rate band amount of up to £325,000.

In the past, non-UK domiciled individuals (who are exposed to IHT only on UK assets) would have been advised to acquire UK real estate through a non-UK registered holding company, which would serve as a "situs blocker" and protected the value of the property from IHT. However, following the introduction of anti-avoidance legislation in April 2017, shares in a non-UK registered company will effectively be treated as UK assets for IHT purposes (so will be exposed to IHT, regardless of the deceased owner's domicile) if and to the extent that their value reflects the value of underlying UK residential property.

Taking out mortgages

The options for mitigating this IHT exposure are now limited. In most cases, the only option will be to purchase the property with the benefit of a commercial mortgage, which should be deductible against the value of the property for IHT purposes. Of course, this comes at the cost of paying interest to the lender, and whether this is worthwhile will vary from case to case.

Borrowing from individuals (eg, friends or family) or non-UK resident trusts offers less IHT protection when viewed holistically because although the debt should be deductible from the borrower's estate for IHT purposes (subject to various legislative conditions being met), the benefit of the debt will be subject to IHT in the lender's hands. This was another of the changes introduced in April 2017.

Life insurance

Given the limited scope for IHT planning, many clients will choose to accept the IHT burden and, instead, take out life insurance to cover the liability that will arise on their death. If they do this, they should be advised to take out the policy through a life insurance trust (or assign the benefit of the policy to a trust) to prevent the proceeds themselves being subject to IHT.

Wills

Clients who acquire UK real estate should also be advised to consider putting in place a UK will. For married couples, the UK will should be structured in a way that allows access to the spouse exemption from IHT, so that the tax liability can be deferred until the second death. While this can potentially be achieved in a foreign will, the added benefit of having a UK will in place is to facilitate the administration of the UK estate on death.

In particular, to obtain probate of a foreign will in the United Kingdom, the Probate Registry will require an affidavit of foreign law confirming the validity of the will as a matter of local law and who is entitled to administer the estate. This gives rise to an additional administrative hurdle (and associated costs) for the executors that would not arise if there was a local will in place.

For further information on this topic please contact Emma Gillies at Forsters LLP by telephone (+44 20 7863 8333) or email ([email protected]). The Forsters LLP website can be accessed at www.forsters.co.uk.

Endnotes

(1) This article is part of a series on advice for UK property owners. For the first article in the series, please see "Asset protection considerations for UK property owners".