The Government confirmed on 13 July 2017 that the new rules imposing inheritance tax on UK residential property owned through non-UK companies (and certain other structures), extending deemed domicile to income tax and capital gains tax for those who have been UK resident for 15 out of 20 tax years, and introducing associated changes to the taxation of non-UK trusts, will be effective from 6 April 2017. There will be no delay in introduction to 6 April 2018.
These rules had previously been included in the Finance (No. 2) Bill 2017 but were removed following the announcement in April of the snap UK General Election on 8 June, leading to a period of significant uncertainty.
Some updated draft legislation has been published. The most notable changes relate to provisions for cleansing of mixed funds by deemed domiciliaries. There have been other minor changes too, for example to close an obvious avoidance opportunity through allowing indirectly held UK residential property to be held by multiple members of the same family and thereby to escape inheritance tax, and to make it clear that there is no difference between a debt and a loan for the purposes of the inheritance tax “relevant loan” provisions. However, significant uncertainties remain, for instance in relation to the extent to which non-UK collateral for relevant UK residential property loans may become subject to inheritance tax. We hope that these uncertainties will be resolved as soon as possible, perhaps through the issue of HMRC guidance.
The full draft legislation will now be included in a Finance Bill, which will be introduced following the return of Parliament on 5 September 2017.
Taxpayers and their advisers will welcome this confirmation from the Government, which puts to an end an unwelcome period of uncertainty about some of the new rules. Those who had put on hold UK residential property restructurings will in many cases now feel able to proceed, since it now seems inevitable (barring a further political upset in the next few months) that the inheritance tax protection afforded to UK residential properties by use of non-UK companies has ceased from 6 April 2017.
Various additional measures, largely aimed at preventing distributions from non-UK trusts being “recycled” to UK residents through non-UK residents or UK resident non-domiciliaries, were originally proposed to be introduced from 6 April 2017 also but were dropped from Finance (No. 2) Bill on the grounds that there had been insufficient time to finalise the drafting of them. Affected taxpayers would be well advised to plan on the basis that a revised form of these rules may well be introduced from 6 April 2018.
We have previously produced detailed briefing notes on the changes, which can be accessed here.