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.

Last updated: 31 July 2018

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.

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