In the Summer Budget 2015, it was announced that significant changes would be made to the taxation of foreign domiciled individuals resident in the UK. From a residential property perspective, the most drastic measure is the proposed change of treatment to properties held within a company structure – a common way for non-UK domiciled individuals to own properties.

As the rules currently stand, where an owner-occupied residential property is owned by a company, there is a tax on this known as the “Annual Tax on Enveloped Dwellings” (ATED), the rates of which correspond to the taxable value of the property. One of the main reasons for setting up such a structure was to take advantage of the Inheritance Tax relief this provides, since the asset held within the company would not form part of a person’s estate for Inheritance Tax purposes. This meant that, where possible, it was encouraging for properties to remain within these structures.

However, change is due with effect from 6 April 2017 to the extent that the value of that holding forms an interest in UK residential property. Where this applies – and the exception is very limited – the asset is no longer deemed “excluded property” and becomes subject to Inheritance Tax. The legislation then extends further by introducing measures to prevent anti-avoidance tactics entered into after 5 April 2017. As a result, any arrangements which seek to avoid the purpose of the legislative changes and achieve a tax advantage will be void. Although requests for it were made, the Government has not provided any relief for structures closed down before the rules come into effect. As a result, a decision should be taken as to whether:

1. the structure remains open; or

2. the structure is closed, incurring Stamp Duty Land Tax and/or Capital Gains Tax.

Where the first option is taken, a view should be made as to the advantages, if any, of paying ATED with no corresponding Inheritance Tax benefit.

Accordingly, those affected by the changes are strongly encouraged to seek legal advice as soon as possible and well in advance of 5 April 2017, bearing in mind that off-shore legal advisers will often need to be consulted as part of any de-enveloping process. Ultimately, whether option one or two is taken, Inheritance Tax relief appears to be off the cards.