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2017 Changes to the Non-Domicile Regime

By on Nov 28, 2017 in Property News

The recent tax changes, which were introduced on 6 April 2017, need to be considered to assess their impact on property structures and assess any possible options for mitigating the possible increased exposure to UK taxation if property is retained within the existing structure.

Offshore companies holding UK residential property are to be treated transparently for UK Inheritance Tax (IHT) purposes from 6 April 2017 onwards. This change will be effected by the Finance Bill 2017 (shortly to come into force), by removing Inheritance Tax “excluded property” status from an interest in a closely held company owing UK residential property. A closely held company is one which derives its value, directly or indirectly, from UK residential property and is owned by five or fewer participators, or owned only by directors, who together control the company.

Where that definition is met, the structure will no longer provide any inheritance tax benefits from 6 April 2017 onwards and will mean that an individual with rights in the company will be taken to own a UK asset subject to 40% Inheritance Tax on their death.

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The legislation is very wide ranging. For example, a person providing a loan, or offering money or money’s worth by way of security, collateral or guarantee, to an individual, a partnership or a trust where the funds are used to finance the acquisition, maintenance or enhancement of UK residential property will be treated as having an asset that is within the charge to IHT. This is because the term “interest” not only includes shares but also loans. It is therefore vital to consider the issue of debt within the structure.

Prior to this legislation, numerous changes had already been introduced in recent years to UK tax legislation applying to high value UK residential property  held via corporate entities. One such change was the Annual Tax on Enveloped Dwellings (“ATED”) which applies where “high value” residential property is held via a “non-natural person”. This regime initially only applied to residential properties worth in excess of £2m on 1 April 2012. However, this threshold was reduced to £1m from 1 April 2015 and to £500,000 from 1 April 2016. ATED would be payable where the property is not let out on a commercial basis to an unconnected third party, for example, if used as a family residence.

The above changes mean that you should review any offshore structure which owns UK property to ascertain the impact of the changes on the structure and whether any Inheritance Tax charges are likely to arise, both periodically and on the death of any person involved in the structure. If ATED is payable, the loss of any IHT benefits as a result of the recent legislation may mean that it may make sense to collapse (de-envelope) the structure, although the tax implications of this will need careful scrutiny. If the structure is retained, it will also be important to ensure that the owners of the interest in the company leave their interests in an IHT beneficial manner, making use of any available exemptions.

Source: Child & Child, UK

Nora Chapman
Nora has been in the Corporate Communications arena for a number of years. Nora's role is to communicate all newsworthy items that are of a PR nature.

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