Inheritance tax (IHT) is no longer just a worry for the super
wealthy. With governments around the world seeking to increase
tax revenues from non-domiciles, more families are at risk
than ever before. Now is a good time to assess your liability
and consider your options. Planning ahead may help protect
your estate in the future.
NEW RULES PUT UK PROPERTY OWNED BY NON-DOMS VIA OFFSHORE
COMPANIES AT RISK OF INHERITANCE TAX
On 6 April 2017, the UK intends to introduce new tax rules
further curtailing the use of offshore companies by non-domiciles
for UK property ownership by making these homes liable for
UK IHT. The impact of the new rules will be felt by a significant
number of people, not just because they target enveloped dwellings
but also because they include lower value properties and homes
which are let out.
Despite the introduction of the Annual Tax on Enveloped Dwellings
by the UK government in 2013, many non-domiciles have continued
to use offshore companies to shelter property in the UK from
IHT. Property enveloped in these structures is currently exempt
from UK IHT because when that property is gifted or transferred
on the death of the beneficial owner, it is actually the shares
in the company (which are non-UK situs) that are transferred
and not the property itself. Without the offshore company,
IHT would be levied at 40% on the value of the property above
the nil rate band (NRB), which is currently set at £325,000.
From the spring of next year, all this will change. Under
the new proposals, residential properties in the UK that form
part or all of the value of an overseas corporate structure
will no longer be excluded from UK IHT. Furthermore, unlike
ATED, there will be no minimum value threshold and no exemption
for property that is let out, putting many more families at
risk. In most cases, inheritance tax will fall due on the
death of a company shareholder.
So what about trusts? Until now trusts have offered non-domiciles
an effective means of sheltering UK property from IHT - if
that property is held in an offshore company whose shares
are in turn held by trustees. However, the new rules, if implemented,
will see trusts deployed in this way immediately lose their
appeal too. The draft legislation includes proposals to charge
IHT when shares in that offshore company are transferred into
a trust, on the death of the settlor within seven years of
the trust's creation, on the tenth anniversary of the trust,
on the death of the settlor if he or she is a beneficiary
of the trust and if the interest in the UK property is distributed
from the trust. So while trusts and offshore companies remain
effective in reducing inheritance tax on assets held outside
the UK, as a means of mitigating inheritance tax on dwellings
in the UK, they have had their day.
Optimists point out that, since there is no current requirement
to disclose the underlying beneficial ownership of an offshore
company owning property in the UK, the new rules are unenforceable.
However, a thorough read of the draft legislation makes this
scenario highly unlikely. It reveals that the UK is seriously
looking at making it impossible to sell an indirectly owned
UK residential property without notifying HMRC and settling
any IHT liability. In addition, in line with the Common Reporting
Standard to which the UK has signed up, the government is
also considering making it obligatory for overseas companies
wishing to purchase property in England and Wales to disclose
the beneficial owners. The almost 100,000 overseas companies
already owning UK property are likely to have to register
beneficial ownership too.
So what should non-domiciles with interests in UK property
do? There are two different potential courses of action. Which
one you choose will depend on your age. Either way, there
is now a strong case to remove property from structures previously
used to provide shelter from IHT. So called "de-enveloping"
means that the property will be owned directly.
So one option is to give your UK situs property to your children
in your lifetime and, provided you live for seven years after
the gift, they will not have to pay any IHT on it. However,
their children will have to pay IHT - unless further protection
is put in place.
Option two is to pay up and buy a whole of life insurance
policy whose benefits can be used to cover the IHT bill. A
life insurance policy can often be a cheaper and simpler strategy.
Insurance protection is also likely to escape the anti-avoidance
agenda being pursued in the UK and in many other jurisdictions.
For those that aren't insurable or who want to save their
grandchildren from having to pay up, life policies can be
gifted to children, if they are old enough. As long as you
place the whole of life policy in an offshore trust, it will
not form part of your children's estate. This way the life
insurance will not be subject to probate delays and will be
immediately available to pay any inheritance tax. So adopting
this strategy ensures that your property will be transferred
on to the next generation without a forced sale to pay the
Some of these solutions are relatively simple and cost effective.
Put in place at the right time, these and other measures could
significantly reduce the impact of inheritance tax on your
legacy. Seeking expert financial advice is essential in order
to avoid putting your estate unnecessarily at risk. To assess
your liability and discuss the options available, please contact
your VFS advisor.