Private Wealth Reforms to the Taxation of UK Residential Property
Introduction The 2015 Summer Budget (8 July 2015) heralded the announcement of fundamental changes to the taxation of non-uk domiciliaries with effect from 6 April 2017: (i) (ii) two categories of UK resident but non-uk domiciliaries will be deemed to be UK domiciled for all UK tax purposes; and trusts or individuals owning UK residential property through an offshore company, partnership or other opaque vehicle, will be subject to UK Inheritance Tax (IHT) on the value of such UK property. Following the UK s vote to leave the EU on 23 June, there was speculation that these issues were no longer top of the Government s agenda. With the House of Commons having adjourned for its summer recess until September, the private wealth industry had not expected further details to be provided until later in the autumn. However, on 19 August the Government published a new consultation dealing with both aspects of the reforms and also inviting comments on the expansion of Business Investment Relief. Crucially, the Government intends to conform to the original timetable. The changes will therefore take effect from 6 April 2017. The deadline for responding to the new consultation is 20 October 2016. It is not clear whether further details and draft legislation will be published during the autumn or whether we must wait for the draft Finance Bill in December. Details of the inheritance tax proposals are set out below. We have issued a separate update on the domicile and remittance proposals. Inheritance tax on UK residential property When will the new rules take effect? 6 April 2017 Who should consider the new rules? Individuals domiciled outside the UK Trusts with settlors or beneficiaries who are domiciled outside the UK Directors of foreign companies owning UK residential property What are the current rules? Currently, non-uk domiciled individuals who buy UK residential properties via non-uk companies do not, for IHT purposes, own a UK asset, and those properties are therefore outside the scope of IHT (which would otherwise be charged at 40% on death) or at 20% on certain lifetime transfers (subject to any reliefs and exemptions). Trusts settled by non-uk domiciled settlors can also protect UK residential properties if the properties are purchased using a non-uk company. But trusts which directly own UK assets are subject to special IHT rules, known as the relevant property regime, which imposes a 6% IHT charge on the value of UK 2
assets every tenth anniversary of a trust and, if there is a distribution of a UK asset in the interim, a proportionate IHT charge on that exit from the trust. What are the proposals? The proposed new rules follow a number of changes to the way in which UK residential property is exposed to UK tax that have been introduced over the past few years, including the Annual Tax on Enveloped Dwellings (ATED) and the higher flat rate of Stamp Duty Land Tax (SDLT) for corporates purchasing residential property. Under the new rules, a non-uk domiciled individual or a non-uk trust owning UK residential property through a non-uk company will be subject to IHT on the value of the property as if it owned it outright. The Government proposes to do this by legislating that shares in such companies (and similar entities) will no longer be outside the scope of IHT to the extent that their value is attributable (directly or indirectly) to UK residential property. The proposals contain an added sting in the tail in the form of double exposure to IHT where UK residential property is owned in a trust in which the settlor has retained a benefit (such as occupying the residential property). The value of the shares attributable to the property will remain in the settlor s estate (to be taxed on death) whilst the trustees are exposed to the ten yearly and (if relevant) interim exit charges to IHT. Deductibility of debts and anti-avoidance proposal In line with current IHT rules, only the net value of the residential property will be exposed to an IHT charge. There are already specific rules in place regarding the types of debt that are deductible for these purposes. The consultation paper suggests that there are to be further changes to the types of debt that are deductible by disregarding loans made between connected parties when determining the value of the property exposed to IHT. It is not yet known what connected means in this context. The Government also proposes to include a Targeted Anti-Avoidance Rule (a TAAR) in the new legislation, the effect of which will be to disregard any arrangements where their whole or main purpose is to avoid or mitigate an IHT charge on UK residential property. Liability and accountability Individuals (or their personal representatives) and trustees who may not have had any filing obligations before will be required to submit a tax return to HMRC whenever there is a chargeable event. It is therefore important for clients to understand whether, and to the extent, they are impacted by the proposed new rules. To assist HMRC in its collection of IHT, the Government plans to expand HMRC s powers so that a property cannot be sold until any outstanding IHT has been paid. Directors of foreign companies owning UK residential property will be affected as a new liability will be imposed on any person who has legal ownership of the property. De-enveloping One of the Government s aims of introducing ATED and a higher SDLT flat rate for corporates purchasing UK residential property was to encourage de-enveloping (i.e. the removal of the property from its corporate envelope). In the advent of double exposure to tax in the form of both ATED and IHT 3
many clients are considering de-enveloping where the residential property is used for personal occupation as opposed to investment. When the proposed IHT changes were initially announced in Budget 2015, the Government said it planned to consider the wider cost of de-enveloping with a view to introducing transitional reliefs to further encourage individuals to exit the envelopes. The consultation document has confirmed that no such incentives will be given. What next? Review residential property holding structures with a view to de-enveloping before 31 March 2017, in order to avoid a further year s ATED filing obligations and, for trustees, IHT filing obligations (and a possible IHT charge) on post 5 April restructuring. Now that the Government has announced that it has no plans to introduce transitional reliefs to incentivise de-enveloping, act now. Where any restructuring is reliant upon the use of friendly debt to reduce IHT exposure, it is advisable to wait until further guidance and draft legislation in respect of the deductibility of such debts is published. Key dates The consultation closes on 20 October 2016. The Government s response to the consultation, further guidance and draft legislation is not expected to be published until December 2016. The new rules will come into force from 6 April 2017. The team To find out more please speak to your usual MTG contact. Clare Maurice +44 (0) 20 7786 8711 Arabella Murphy +44 (0) 20 7786 8714 4
Emma-Jane Weider +44 (0) 20 7786 8723 Ed Powles +44 (0) 20 7786 8723 Fiona Poole Senior Associate +44 (0) 20 7786 8737 Jennifer Emms Senior Associate +44 (0) 20 7786 8653 Claire Weeks Associate +44 (0) 20 7786 8727 Jessica Schock Associate +44 (0) 20 7786 8672 August 2016 These notes do not contain or constitute legal advice, and no reliance should be placed on them. If you have any questions, please do not hesitate to speak to your usual contact at Maurice Turnor Gardner LLP. 5