Do you own property in the UK?
Monday 15 February 2016
By Martyn Russell, Director, Equiom Guernsey
Martyn Russell is a Director at Equiom’s Guernsey office. With over thirty years’ experience in the fiduciary services industry, he specialises in the management and administration of ownership structures for property and luxury assets - such as yachts and aircraft. Here, he addresses some tax considerations for Channel Islands residents who own property in the UK.
The last few years have seen significant change in the way in which non-UK domiciled persons are taxable in relation to UK residential property. We have witnessed ownership via a company being subject to the introduction of the Annual Tax on Enveloped Dwellings (ATED) and an increase in Stamp Duty Land Tax (SDLT) rates to 15%. This was followed by the extension of Capital Gains Tax to both non-UK resident companies and non-UK resident individuals. One would have thought that enough turmoil had been created and that there would be a period of calm, but on 8 July last year, and as part of the UK Summer Budget, proposals were announced to fundamentally change the Inheritance Tax (IHT) treatment of UK residential property owned via an offshore company. Below we consider the theme of the proposed changes.
Currently, non-UK domiciled persons can own UK residential property via an offshore company and its value is outside of UK IHT on their death.
Even when the non-domiciled person has been resident in the UK for many years, it is possible to structure the ownership in such a way that it remains outside of UK IHT on death. This so-called ‘Excluded Property Trust’ is widely used by non-UK domiciles who are long-term residents of the UK.
The much commented on introduction of a 15% rate of SDLT and the ATED charge was intended to make ownership of certain residential property via companies prohibitive, the increased SDLT and ATED of up to £218,200 per annum acting as a deterrent to using a company to acquire the property.
There is no doubt that these measures were hugely unpopular with international investors and long-term UK resident non-domiciles alike, but as the offshore company continued to provide an IHT shelter, many paid, and continue to pay, the additional fees to secure that IHT protection. The so-called rush to ‘de-envelope’ did not materialise and, as a consequence, the UK Treasury has received significant amounts of unanticipated tax revenue.
All Change from 06 April 2017
On Budget Day last year, HMRC released a technical note in which it stated: ‘The government intends to amend the rules on excluded property so that trusts or individuals owning residential property through an offshore company, partnership or other opaque vehicle will pay IHT on the value of such property…’
The proposed effect of the announcement is to treat the offshore company as transparent and, effectively, deem the shareholder as the direct owner of the property. In this situation on the death of the shareholder, he/she is treated as owning a UK-located asset (the property) and its net value will come into the scope of IHT (subject to nil rate bands etc).
By way of an example, Mr Smith, a Channel Islands resident, non-UK domiciled individual owns, via a Channel Islands company, a UK residential property valued at £2,500,000. The property has been owned for many years and has benefitted from a significant increase in value, while at the same time it has seen a considerable reduction in the original mortgage borrowings. The result of this is that the value of the property, after deducting the remaining mortgage, is £2,000,000. Mr Smith, who is single, dies and after deducting his nil rate band of £325,000 from the net value of the property, his estate will suffer 40% IHT, which amounts to £670,000.
Prior to 6 April 2017, the corporate ownership would have been respected and he would have died holding a Channel Islands-located asset, i.e. the shares in the Channel Islands company, which for a non-UK domiciled person would have been completely outside of a charge to IHT.
Future Mitigation Strategies
Until we see the detail of the consultation document, we cannot be certain what sophisticated mitigation opportunities will exist. We do have some initial planning thoughts that we will develop as we near 6 April 2017 but, for now, there are two strategies that are robust and non-aggressive:
1. Fund the acquisition of the property by borrowing and, if possible, arrange a high loan to value/interest-only facility. Although the mainstream lenders may not typically offer such a product, there are niche lenders entering the market with a more flexible approach. This strategy will reduce the value of the property exposed to IHT.
2. Consider pure life insurance cover, where the sum insured is equivalent to the anticipated IHT charge. Products available are becoming more refined and it is now possible to secure a 10/15-year term ‘second to die’ policy. Depending on the age and health of the insured person, the premiums can be significantly less than current ATED charges.
For further information on this subject, please contact Martyn Russell.