Loading…

Non-UK resident trusts: IHT and UK residential property - beware of the two-year tail.

From 6 April 2017, offshore companies owning UK residential property or having used loans to buy/maintain such property, ceased to be classed as excluded property and became chargeable to the UK's Inheritance Tax. Mistakes may mean an unexpected 6% tax based on the market value.

Offshore trustees in particular may be reviewing their structure in light of the changes, but the two-year trap will catch the unwary because there may not be an obvious link with UK residential property at the time of the review.

The value chargeable to IHT is the interest in the company that relates to UK residential property. This includes not just the shares in the company but loans made to it by the trustees.

While the sale of the UK residential property from within the company itself will eliminate the IHT exposure, some people may not be aware that if the shares in the company are sold to a third-party rather than just the property, the sale proceeds (to the extent they relate to the UK property sold), will remain subject to IHT for a further two year period after sale. Such a sale is often done for Stamp Duty Land Tax reasons but this needs to be very carefully considered because you acquire the company's history.

Furthermore, a similar position arises on the repayment of loans made to beneficiaries that are linked to UK residential property. A loan made from a trust or company to beneficiaries to help fund the purchase of UK residential property is a common scenario for offshore trusts. A sale of the property and repayment of any associated loan will reinstate the excluded property status of the trust or company assets. However, if the loan is repaid but the UK property remains held by the beneficiary, the proceeds of the loan repayment would remain subject to IHT for a further two-year period.

We therefore recommend that trustees review the assets held in offshore trust structures around three years before a ten-year anniversary charge arises to consider any planning opportunities that may be available to mitigate the IHT. 

More than ever it will be important for trustees to understand the purpose of a loan made to a beneficiary.

If you require any guidance or advice in this area, please approach your usual Buzzacott contact or email enquiries@buzzacott.co.uk.

This article was taken from the Spring 2018 issue of the Private Client team's Quarterly Tax Digest. You can access all the other articles here.

You might also be interested in… Tax planning and advice for individuals.

UK Personal Tax Compliance

We see the Tax Return as a window into our client’s life and the best way for us to get to know each other very well. We aim to see that the right amount is paid at the right time on the basis of full, accurate and timely disclosure. 

We assume a role somewhere between trusted advisor and knowledgeable friend – a role vital in ensuring clients are able to keep and enjoy more of what they earn and bequeath it to the next generation.

UK Personal Tax Planning

UK tax is constantly changing and you will have events that require tax planning (e.g. a possible investment into a business or sale of an asset) while also having ideas of how you would like to use your wealth to benefit you and your family (e.g. via gifts or the creation of trusts).

We aim to ensure that you make the most of the tax legislation, while being cautious and reasonable in our approach to tax planning.

Non-Doms and Non-UK Residents

Foreign domiciled UK residents have access to some very beneficial tax rules but those benefits come with complexity, which is ever increasing. We help those who are yet to come to the UK, are already here or those who have left to ensure that they make the most of the available rules.

For anyone outside the UK who owns UK real estate (including non-UK companies), we help them with their ongoing tax compliance and any related tax planning.

US tax

If you’re a US citizen living in the UK or you’re planning to move here, there will be a number of important life stages that you will need to plan for. Our dual-qualified US and UK tax experts have an intricate understanding of both systems. Tell us your story and together we’ll assess your liabilities and tackle any issues before they become an issue.