From 6 April 2017, non-dom owners of UK property will be liable to inheritance tax (IHT) at 40% on any UK residential property they own. This has always been the case where a non-dom (broadly an individual who is resident in the UK but who has their permanent home abroad) owns UK property directly, but not when it is owned via an offshore company. That is changing. Geoffrey Todd and Athel Hodge outline the five things developers and agents need to know.
One – Offshore companies
It used to be standard practice for non-doms to buy UK homes through an offshore company structure so that they owned shares in a non-UK company rather than the underlying property. This was principally because non-doms are not subject to IHT on foreign assets (i.e. the non-UK shares) upon their death. However, from April where UK residential property is owned through an offshore company or an offshore partnership the value of those shares attributable to the property will be in the owner's estate for IHT purposes.
Two - Loans
From 6 April, any loans made by a non-dom which are used by the borrower to acquire or maintain a UK residential property will be in the lenders estate for IHT purposes and will remain subject to IHT for two years after the loan has been repaid. Equally, non-doms who simply provided collateral or guarantees for the loan will also be caught. This may come as a shock to some non-dom parents who, for instance, guaranteed loans to their UK resident children to help them get on the housing ladder.
An added complication of these new rules is that there does not have to be causal link between the loan and its use. For instance, a non-dom could loan monies to their grandchild to spend however they like and, if a few years down the line, they use it to renovate their house, then the loan could be subject to IHT on the non-dom’s death.
Three – Offshore trusts
Offshore companies which own UK property are often wholly owned by an offshore trust because trusts set up by a non-dom are not subject to IHT trust charges on any foreign property they own, even if the settlor later becomes domiciled in the UK. From April any UK residential property held in an offshore company will be attributed to the trust and will be subject to tax at a maximum of 6% at 10 yearly intervals and when the residential property interest is sold.
Similarly, where loans have been made to acquire/maintain UK residential property via offshore trust structures, the value of the loan will be subject to IHT trust charges and an exit charge when paid off.
Four – Four further changes to corporate structures
In addition to the above IHT changes affecting the taxation of offshore companies holding UK residential property, there have been a number of other changes targeted at such corporates:
- The Annual Tax on Enveloped Dwellings (ATED) is a charge payable each year of between £3,500 and £218,200 by companies holding residential property. The exact amount payable depends on the value of the dwelling. Certain reliefs from ATED are available.
- A punitive SDLT rate of 15% now applies where a company purchases UK residential property for £500K or more (subject to any relief being available).
- Whereas previously non-residential entities (including companies) paid no tax on gains accruing to UK assets, there is a new tax from April 2015, Non Resident Capital Gains Tax (NRCGT) which now applies on the sale by non-resident entities of UK residential property. For companies the relevant rate is 20%.
- Finally, for those who have been attracted to companies because of the anonymity they have traditionally afforded shareholders, there may be introduced a new "Public Register of Beneficial Ownership" which could undo this.
Five - De-enveloping
For all of the above reasons many people are now seeking to remove their UK residential property from companies and instead hold them personally. This is known as "de-enveloping". Making such a transfer constitutes a disposal for tax purposes and so the tax implications need to be considered carefully. If the property has been within the charge to ATED this would trigger an ATED-related CGT cost (at 28%) on any gains accruing to the property transferred. Similarly, NRCGT may be chargeable if the property has risen in value since April 2015.
Finally, SDLT is generally not payable where no consideration is given for the property but can be triggered on a de-enveloping (not withstanding that no consideration is paid) where the property transferred is subject to a mortgage.
Changing the tax affairs of wealthy individuals is complex. Professional advice should always be sought prior to undertaking any proposed restructuring.