International Investors Acquiring UK Residential Property – A New Approach

Thursday 17 August 2017

By Kevin Renshaw, Director - Tax, Equiom Isle of Man

For many years UK residential property has been the international investor’s asset class of choice.

Prior to 2013, international investors enjoyed an incredibly benign UK tax regime and even after the introduction of the Annual Tax On Enveloped Dwellings ('ATED'), 15% Stamp Duty Land Tax (’SDLT’) and the extension of Capital Gains Tax to UK residential property, it remained a popular investment asset – not least as a result of the post Brexit near 20% depreciation of sterling versus the US dollar and worldwide currencies pegged to the dollar.

Changes from 6 April 2017

However, from the 6 April 2017, a fundamental change in UK Inheritance Tax (’IHT’) legislation has been proposed. From that date the value of UK residential property owned via, for example a British Virgin Island, Jersey or Isle of Man company is subject to UK IHT on the death of the shareholder of the company.

Additionally any loans advanced directly by an individual or via an offshore company, to enable UK residential property to be acquired or improved, are also within the grasp of UK IHT.

These are far reaching changes and will render most offshore company ownership structures ineffective for IHT purposes. For future acquisitions of UK residential property new thinking is required and a new approach needs to be considered.

Even with the recent changes, it is still possible to secure IHT protection, but the means by which this is achieved requires a more sophisticated approach. Where the solution includes a trust it may well incur 10 year charges at 6% of the net asset value of the property - a cost that will need to be factored in, but for many this will be preferable to a 40% charge on death.

There is not one solution that will work for everyone, instead there is a menu of solutions and depending on an individual’s fact pattern and objectives, there will be a clear choice for that particular investor.

In circumstances where the investor is acquiring UK residential buy to let property, there may be merit in considering a Family Investment Company.

This strategy allows the patriarch or matriarch of the family to share ownership of the offshore company with their spouse and children (both adult and minor).

If one considers a leveraged buy to let property where the net asset value is £1.5million and there are 5 family members as shareholders, then each shareholder’s value is £300K (£1.5million divided by 5). This is below the IHT nil rate band of £325K, so the death of any individual shareholder does not trigger any IHT. Conversely if the patriarch was the sole shareholder, his death could trigger IHT of approximately £500K.

It should also be noted that in the above circumstances, offshore company ownership would not create an ATED charge, nor would it be subject to 15% SDLT on the entire purchase price.

It remains possible to put in place robust planning that enables high value UK residential property to be acquired and occupied by the investors family in an IHT efficient manner and a mechanism exists to allow families to buy apartments for their sons and daughters whist attending university in the UK, in such a way that any potential IHT risks are mitigated, whilst again the ownership structure is outside of ATED and the worst effects of 15% SDLT.

In some circumstances, the simplest planning will be to accept the IHT charge, but in such cases consideration should be given to life insurance, which on death will fund the IHT liability.

No one answer is right for all investors, but from a suite of solutions investors can select the best fit for their personal needs.


Contact

If you have any questions or would like to discuss your situation, please contact Kevin Renshaw.