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Changes to Inheritance Tax on UK residential property

Trust, Estate and Family - 09 Dec 2016

In the draft legislation released on 5 December 2016 the government confirmed the announcements made in the 2015 Summer Budget and following consultation, that Inheritance Tax (IHT) will be extended to UK residential properties held by non-domiciled individuals through overseas vehicles such as offshore partnerships, close companies or non-resident settlements.  In line with other changes made by the government affecting non-domiciled individuals the rationale is that this is to bring these individuals into line with UK domiciled individuals and comes into effect from 6 April 2017.  For close companies (broadly those owned by 5 or fewer shareholders) owning UK residential property the tax charge will reflect the value of the shareholding, rather than the underlying property, so minority shareholdings may benefit from a discount.  Partners in partnerships will be treated as if they own UK residential property directly rather than an interest in the partnership.  Where residential property owned personally has been gifted to a trust this may now in some circumstances result in inheritance tax charges for both the trust and the individual.

Despite representations the government has not provided a window for de-enveloping such property owning structures.  Consequently, individuals wishing to reorganise their property owning structures may realise CGT or Stamp Duty Land Tax charges when doing so.  Property owning structures currently paying the Annual Tax on Enveloped Dwellings (ATED) will therefore no longer provide IHT protection so consideration should be given to de-enveloping these structures, if IHT was the main motivator, as the ATED charge will continue to be due.

In addition, if a partnership or a close company sells its interest in a UK residential property, then the cash proceeds will continue to be subject to IHT for a further two year period.

Finally, in changes previously unannounced, if funds are loaned to a structure in order to acquire or enhance a UK residential property directly or indirectly, then the lender will also be subject to IHT in the same way as if the property was held by them directly.  In some cases this could lead to a double charge to inheritance tax on the same property.

It is therefore important for all structures holding UK residential property to be reviewed in order to assess the impact of these changes and the tax cost of removing the property from the structure.

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Justin Cobb

Justin Cobb

Senior Tax Manager

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Office: London