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Update on the taxation of UK residential property owned by offshore structures

Frank Hirth News - 16 Oct 2015

There have been two major announcements that may impact how UK residential property is owned and taxed in the future;

An extension to the ATED (Annual Tax on Enveloped Dwellings) rules for UK residential properties worth more than £1 million as at 1 April 2012 (or the value at acquisition if later) requires annual informational filing and a potential tax payment to HMRC
A proposal to bring UK residential property held indirectly by non-UK corporate structures within the scope of UK Inheritance Tax from 6 April 2017 onwards

Extension To ATED

The ATED was introduced by the government from 1 April 2013 in respect of UK residential properties worth more than £2 million held by “Non-Natural Persons” (NNPs) such as a company, a collective investment vehicle or a partnership with a corporate member. This applies to a UK or non-UK structure.

The 2014 Budget included an extension to the ATED regime with any NNPs holding residential property valued at more than £1 million as at 1 April 2012 (or the value at acquisition if later) will be required to complete an ATED return and potentially make an annual payment.

If the property is worth between £1 million and £2 million and falls within the scope of ATED, the owner will need to complete an ATED return and send it to HMRC. For the 2015-16 period covering 1 April 2015 to 31 March 2016, an ATED return was due by 1 October 2015 and any payment is due by 31 October 2015.

Relief from an ATED payment is available if the residential property is let to a third party on a commercial basis and is not occupied by anyone connected with the owner (other reliefs are potentially applicable). An ‘ATED Relief Declaration’ return will still need to be filed to claim the relief.

For future years, the ATED return and any payment for properties subject to ATED worth more than £1 million will be due 30 days after the start of the chargeable period (e.g. for the 2016-17 period, due by 30 April 2016.)

Chargeable amounts for the 2015/16 period are as follows:

Property Value As At 1 April 2012  Annual Chargeable Amount 2015-2016
More than £1 million but not more than £2 million £7,000
More than £2 million but not more than £5 million £23,350
More than £5 million but not more than £10 million £54,450
More than £10 million but not more than £20 million £109,050
More than £20 million £218,200

From 1 April 2016, a further valuation band will be introduced for properties valued at more than £500,000 as at 1 April 2012 (or value at acquisition if later). The annual charge for a property in this band is expected to be £3,500.

UK Inheritance Tax On UK residential property

In the 2015 Summer Budget, the government announced it intends to bring all UK residential property held directly or indirectly by non-UK domiciled individuals into charge for UK Inheritance Tax purposes. This is due to be introduced from 6 April 2017 and will apply when the property is owned through an indirect structure such as an offshore company, partnership or trust.

HMRC’s aim is to make UK residential property subject to UK Inheritance Tax whether it is held personally by a UK resident or non UK resident, subject to any applicable Double Taxation Agreement in place.

HMRC have concluded that the most common reason for ‘enveloping’ UK property in an offshore structure is to mitigate the potential UK Inheritance Tax cost from holding it personally. As this announcement may lead to ‘de-enveloping’, a consultation will be undertaken shortly to consider the potential costs associated with such a change and therefore advice should be sought before any action is taken.

This extended scope of Inheritance Tax will have no equivalent thresholds or reliefs that apply for ATED-related residential properties above. No equivalent measures have been announced for UK commercial property to date.

If you have any queries or think you may have an affected property, contact our team at Frank Hirth today – we can provide expert insight on how tax changes will affect you, whether you’re an individual or business.

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Leigh Collins

Leigh Collins

Senior Tax Manager

T: +44 (0) 20 7833 3500
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Office: London