How ‘non-doms’ with UK property can avoid UK Inheritance Tax
Please note that tax law is a complex subject and you should not rely on this article without professional advice on the facts of your case. Nothing herein constitutes financial advice and if you are in any doubt as to your financial position you should consult an IFA.
Q: I recently purchased a London property that is now worth around £6 million. Is there any tax risk relating to the property?
A: One particular risk is UK Inheritance Tax. This tax is charged at 40% on the value of an estate above the nil rate band (currently £325,000 and staying at that level for the foreseeable future). If the property is not transferred to your spouse your heirs will be facing a charge of more than £2.25 million. This is a charge which usually results in the property having to be sold, often at a lower price than the owners would have hoped for.
Q: I have heard that it is possible to use an offshore company to avoid this charge. Could I put my property into an offshore company?
A: There are additional factors to consider here but for inheritance tax purposes, yes this is effective for individuals who are not domiciled in the UK. This is because for these individuals, only their UK assets are within UK inheritance tax. When you own shares in non-UK companies, these are non-UK assets and exempt from this 40% tax even if the only asset held by the company is UK real estate. However, this will only be effective if you remain non-domiciled in the UK.
Q: I am not decided on what will happen in the future but I am settled here and have no immediate plans to leave the UK. Does this pose a problem?
A: It may do. If you continue to live in the UK, there is a risk of you becoming UK domiciled either by a common law test that you intend to remain here permanently, or via a statutory test when you have spent 17 of the last 20 years as tax resident in the UK. If you were to obtain a UK domicile your worldwide assets would be within the scope of UK Inheritance Tax. This will, therefore, include the value of any shares in offshore companies making the planning ineffective.
Q: Does this mean that I will have to leave the UK before I acquire a domicile here to avoid the charge?
A: No, it is possible to put structures in place now, assuming you have not already obtained a UK domicile. It is highly unlikely that you will have obtained a UK domicile after only a few of years living here. The structure can be achieved by the creation of an ‘excluded property trust’ usually called an “EPT”. This is a non-UK trust, preferably with professional trustees based outside the UK, into which non-UK assets (shares in non-UK companies, for example) are transferred. So long as you are not domiciled in the UK at the time you transfer the assets into the trust, the non-UK assets within the trust will be outside the scope of UK Inheritance Tax.
Q: What if I become UK domiciled at a later stage?
A: These assets will continue to be exempt even if you later become domiciled here.
Q: Will there be any tax charges when I transfer the property?
A: As mentioned, in order to transfer property into the trust without an inheritance tax charge, it is first necessary to convert it into a non-UK asset by transferring it to a non-UK company. This transfer constitutes a conveyance, and as such will result in a charge to Stamp Duty Land Tax. This will be high in your case - 15% of the property value.
Q: Is there anyway to avoid this charge?
A: There are structures which can be put in place to mitigate against this charge and we are able to advise on this further on request. Alternatively you can do nothing until you next move home and then buy in the name of an offshore company.
Q: This seems quite a simple way of avoiding inheritance tax. Are there any complicating factors?
A: Although this is an effective and often employed method for non-domiciled individuals to avoid UK inheritance tax, it is always necessary to give careful consideration to the individual circumstances when putting in place the structure required. There are new rules which result in additional taxes for owning a property in this structure. This includes high SDLT rates at the start, an annual charge during the period of ownership and a capital gains tax charge on exit. These charges may not apply if you are letting out the property or if you have purchased it with the intention to develop. Careful consideration is required here.
Alternative structures may be worth consideration including ownership via a nominee or a trust.
If the property is to be rented out careful consideration needs to be given to the Non-Resident Landlord Scheme and exposure to UK income tax on the owning company.
Q: Does this work when first acquiring property?
A: Yes, it is often simpler to put in place when first purchasing a property as the transaction can be carried on in the name of the non-UK company. It is not unusual for high value UK properties to be acquired via non-UK companies.
Q: Are there any other advantages to owning a UK property through a non-UK company?
A: Yes. The UK Land Registry allows anyone internet access to the ownership records of your property. It reveals who owns the property and what they paid for it and whether they have a mortgage. If you use a non-UK company you can avoid your name appearing.
David Anderson - Solicitor and Chartered Tax Adviser