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IHT Charge on Residential Property held in Offshore Structures

From April 2017, UK inheritance tax (IHT) will be extended to non-UK structures holding UK sited residential property.

This is a major change as this form of residential property ownership is not currently subject to IHT.

The government have clarified the scope of the new legislation and so now is the time to review your current position and take the appropriate action.

The proposed changes will apply if an offshore entity’s shareholder is a non-UK domiciled individual or a trust with settlors/beneficiaries who are non-UK domiciled. It also applies to an overseas partnership that holds residential property in the UK and has a non-UK domiciled individual as a partner. Certain types of offshore debt or loan structures may be targeted that are not covered within this article.

Some of the main trigger events from April 2017 for IHT purposes will include: – Death of a shareholder or passing within seven years following a gift of shares.

– Redistribution of share capital.

– Gift of shares by a non UK domiciled shareholder.

– Ten year anniversary of a trust.

The new legislation brings the charge into line with the latest non-resident capital gains tax (CGT) charge. However, unlike the CGT rules, a main residence will not be exempt from IHT. Furthermore, unlike the Annual Tax on Enveloped Dwellings (ATED), there will be no exemption by virtue of residential letting on a commercial basis. Hence, non-resident landlords will be caught. The de-minimis market valuation exclusion of £500,000 will also not apply.