Changes to the inheritance tax (‘IHT’) treatment of UK residential property were originally proposed in the Summer Budget 2015, to take effect as of 6 April 2017. To date, UK residential property has commonly been owned via non-UK entities (e.g. trusts, companies, partnerships or a combination thereof), largely as a result of the potential inheritance tax protection available in this regard.
From 6 April 2017, however, non-UK entities will essentially be ‘look through’ from an inheritance tax perspective the extent that they hold UK residential property. The implementation of this regime has since been subject to lengthy consultation, and draft legislation enacting the changes was finally issued in the Finance Bill 2017 earlier this month.
As part of the consultation, the government did consider whether there was a case for ‘de-enveloping’ reliefs to mitigate potential tax charges on unwinding offshore holding structures for UK residential property. It has been concluded, however, that no such reliefs will be made available.
The key messages from the forthcoming changes could be therefore summarised as follows:
- from 6 April 2017, it will no longer be possible for an ‘offshore’ structure to provide protection against inheritance tax so far as UK residential property is concerned;
- anti-avoidance rules will be introduced, and the value of debts owed between connected parties (e.g. between a trust and an underlying company) will typically not be an allowable deduction for inheritance tax purposes;
- existing structures should be reviewed in the context of the above;
- personal ownership of UK residential property may be comparatively more attractive going forward, particularly where properties are not held for rental or development purposes; and
- traditional inheritance tax planning principles based on passing value to future generations will be important going forward.
We would be happy to discuss the application of the new rules to existing structures and any related queries in this regard. Please contact us to speak to an adviser.