New rules are being brought in from April 2017 to charge Inheritance Tax (IHT) on UK residential property held in offshore structures. This is a major change for non-domiciliaries, making it more difficult to manage IHT exposure on UK residential property. In the past, a non-domiciled individual wishing to acquire UK property would typically hold the property via a non-resident company which in turn was held by a trust. The trust’s asset was the shares of the non-resident company. This was ‘excluded property’ and effectively ‘exported’ the UK property, so that it was sheltered from IHT.
From 6 April 2017, the definition of ‘excluded property’ will change so that the shares of an offshore company will not be ‘excluded’ to the extent that the company derives its value from UK residential property, and therefore the shares will be liable to UK IHT. Similar rules will apply where UK residential property is owned via offshore partnerships or other vehicles. The new rules will apply to all chargeable events (eg, a death or a trust 10 year anniversary) after 5 April 2017.
There will be no exemption for commercially let properties and no incentive to encourage removal of UK properties from offshore structures.
New rules also mean that loans used to acquire UK residential property, or assets used as security or guarantees for such loans, may also be treated as UK assets, which are liable to IHT for the lender.
Planning for change
Whole-of-life insurance policies
Whole of Life insurance pays out a lump sum on death regardless of the age of the deceased person covered, effectively providing a guaranteed benefit on death. By taking out a whole-of-life insurance policy for the value of the IHT, owners and beneficiaries can be assured that the liability on such structures is covered. Benefits paid out on such policies are typically much higher than the cost of the cover, providing an overall saving to the trust, partnerships or property company.
The policy would then be written into a separate trust to ensure that the proceeds paid at claim are separated from the estate and do not increase the overall inheritance tax liability.
This can be a complicated process requiring an understanding of the change in the rules and experience of setting up a trust, but it needn’t be with the guidance of an experienced adviser such as Knight Frank Finance.
If you currently have a loan or asset used as security to acquire UK residential properties you may need to consider new options and financing for this purpose. Knight Frank Finance is a specialist whole of market mortgage broker, with exceptional relationships with both private and high street banks. Advisers have unparalleled knowledge, skills and are able to advise on a broad spectrum of finance solutions that are tailored to your current and future needs.
As with any financial solution, this advice should be tailored to your individual circumstances. For personal advice, please contact Knight Frank Finance
+44 20 7268 2575