If you are a Guernsey resident considering an investment in UK residential property (whether directly, or via a trust or company structure) then, since 6 April 2015, you will have had to include the cost of paying capital gains tax on sale of the property in your calculations.
Hidden in the detail of the UK Government’s recent budget announcement were proposals to extend the scope of another UK tax to those same non-UK owners of UK residential property
– this time, Inheritance Tax (IHT).
The proposals are expected to come into force with effect from 6 April 2017 and the detail behind them will be the subject of Consultation later in the year, but HM Revenue and Customs (HMRC) guidance indicates that we can expect to see the following provisions included:
- The definition of “Residential Property” will be the same as that included in the recent non-resident Capital Gains Tax rules; simplistically, it will apply to any property capable of domestic habitation regardless of the use to which the property is actually put (for example, private occupation, let on a commercial basis, vacant, etc).
- IHT will apply regardless of how the UK property is owned – whether directly by an individual; via a company or partnership; within a Trust; or via what HMRC describe as “other opaque structures”.
- IHT is expected to be charged on the same basis as for UK-domiciled individuals, with the same allowances and exemptions (with special rules for Trusts). Currently, IHT is charged at a rate of 40% on assets in excess of the nil-rate band (£325,000), although transfers between spouses are exempted.
Where a property is owned by an individual, IHT will continue to be chargeable on their death. Any gifts of UK property within the seven years prior to death will remain “potentially chargeable” and, where the right to use the property is retained following any gift, the gift is ignored for IHT purposes.
Where a property is owned by a company, IHT will be chargeable on occurrence of any one of a number of “events”:
- On death of the individual owning the company’s shares;
- On gift of the company’s shares into Trust;
- On the “10-year anniversary” of any such Trust;
- On distribution of the company’s shares out of Trust;
- On death of the donor within seven years of gifting the company’s shares to an individual; or
- On the death of the donor (regardless of the period of time lapsed) where they have retained an “interest” in the property or shares.
It is likely to be very difficult to avoid paying Inheritance Tax where a deceased estate includes UK residential property – HMRC state that anti-avoidance legislation will be specifically targeted to prevent any manipulation of the Rules.
It is also worth noting that the rules applicable to UK-domiciled individuals make both the personal representative of the deceased (ie, the Executor of the Estate) and the individual beneficiaries of the Will liable for the tax, and it is likely that similar provisions will be included in the new regulations – simply “not telling” HMRC is not an option.
It is worth highlighting that, at this stage, these are only proposals and that we will need to wait for the results of the proposed consultation later in the year for details of exactly how HMRC intend to enforce them. However, a substantial reduction in scope seems unlikely.
It is also worth noting that, at this stage, IHT is intended to extend only to UK residential property – to the extent that it is held within a non-UK company (or non-UK Trust) commercial property and other UK investments, such as stocks and shares, will remain outside the scope of IHT.
If you would like to discuss any of the points raised in this article, and their impact on your particular circumstances, please get in touch.
Colin Jeffreys, FCCA
14 July 2015
This article has been prepared as a general guide. It is not a substitute for professional advice. Neither Collenette Jones Limited nor its directors or employees accept any responsibility for loss or damage incurred as a result of acting or refraining to act upon anything contained in or omitted from this document.