UK Inheritance Rules: Changes Affecting Non-UK Resident Individuals
By Hed Amitai and Rich Risino, Memery Crystal LLP
Since the introduction of the Annual Tax on Enveloped Dwellings (ATED) in 2013, corporates holding properties have been targeted, with changes to tax law being implemented on an almost yearly basis. ATED capital gains tax, non-resident capital gains tax, income and corporation tax changes and alignments have all been or are being introduced.
The rationale for the changes in the way property is taxed in the UK is a government drive to “level the playing field” for resident and non-resident investors.
Until 06 April 2017, a non-UK domiciled individual, or a non-UK resident trust, holding UK residential property interests through a non- UK company, remained outside the scope of the UK inheritance tax (IHT) regime. This was on the basis that the shares in a non-UK resident company were excluded property for IHT purposes.
From 06 April 2017, where the value of shares in a non-UK company are directly attributable to a UK residential property interest, the shares are within the scope of IHT. This means that the estate of a non-UK resident individual holding UK residential property through a non-UK company will now be subject to UK IHT (at a rate of 40%) on the attributable value. UK IHT allowance is limited to GBP 325,000 per person.
Similarly, if the non-UK company is held through a Trust, the value will be attributed to the Trust for its IHT 10 yearly annual charge (at a rate of 6%).
As it is the shares which are drawn into the scope of a charge to IHT, it is the value of the shares which is relevant for IHT purposes and which introduces valuation diffculties. Whether the value of the shares is the same as the value of the residential property interest will not always be the case. There may be a minority-interest issue, latent gains or annual ATED charges, to name but a few, which any purchaser would take into account and which will reduce the value of the shares.
There may equally be an upside in valuation issues to consider: a purchaser may prefer to buy the shares in the corporate on the basis that stamp duty payable on the sale of shares is much lower than the stamp duty due on the acquisition of the property.
Complexities with debt, groups of companies and situations where companies own assets other than residential property interests, will need to be given careful consideration.
It follows that UK property interests held in non-UK corporate vehicles are now subject to potential charge to IHT, as well as a raft of other taxes. All such structures must be carefully reconsidered to make sure they still deliver the benefits and protection they were set up to secure.
Hed AmitaiMemery Crystal LLP, London, UK
T: +44 20 7242 59 05
Memery Crystal LLP is recognised as one of the UK’s top law firms in their specialist areas including real estate and tax, and regularly cited in Chambers and The Legal 500.
Hed Amitai, Partner – Wealth Structuring: Hed specialises in asset structuring and capital tax planning. He advises trustees, foundations, financial institutions and asset managers as well as international businesses on tax, corporate structuring, and legal reporting and compliance obligations.
Rich RisinoMemery Crystal LLP, London, UK
T: +44 20 7242 59 05
Rich Risino, Senior Associate – Wealth Structuring: Rich focuses on advising HNIs, entrepreneurs and their families on asset and investment structuring, income and capital taxation. He project manages instructions on behalf of clients, and often co-ordinates tax advice across several jurisdictions.
Published: Trust & Estate Planning, No. 03, Spring 2019 l Photo: Victor Moussa - stock.adobe.com