Individuals who are domiciled outside the UK will be aware that their exposure to UK IHT is limited to their UK assets. Any foreign assets owned by foreign domiciliaries remain outside the scope of UK IHT until the individual becomes deemed domiciled (broadly once they have been resident in the UK in more than 15 out of the previous 20 tax years, under new rules being introduced next year). 

These excluded property rules enable foreign domiciled individuals (and trusts created by foreign domiciled individuals) to escape UK IHT on UK assets by using an offshore vehicle such as a company to own them.

By enveloping assets in this way, they are treated for UK IHT as owning non-UK situs shares, without having to look through to the underlying assets. However, this is set to change from 6 April 2017 as far as UK residential property is concerned.

Draft legislation is not yet available and will not be enacted before Finance Act 2017, but we understand the intention is for trusts and individuals owning assets through a company or other structure to become subject to UK IHT to the extent of the net value of UK residential property from 6 April 2017.

This will put them on a more equal footing with UK domiciliaries. Diversely held vehicles will not however be caught. The new rules are targeted at UK dwellings, with commercial property and other UK assets held in structures remaining unaffected.

The implications will be far reaching and owners of UK residential property via structures should review their arrangements in advance of 6 April 2017. In many cases it will be beneficial to remove UK residential property from structures and hold it directly in personal names.

The exposure to various capital gains taxes (including annual tax on enveloped dwellings (ATED) - related CGT, non-resident CGT and anti-avoidance provisions) as well as stamp duty land tax (SDLT) implications of de-enveloping in this way will however need to be considered in detail in advance.

The government has indicated that relief will be available which could help reduce or defer capital gains tax exposure, but details are not expected to be published before July 2016 at the very earliest. Corporate ownership may continue to be beneficial in some circumstances, particularly if there is a rental business. Trust ownership carries costs and complexity but is often appropriate for non-tax reasons and can be helpful to spread the IHT cost and give certainty. 

About the author

Alison Palmer CTA is a director at Mercer & Hole, based at the firm’s London office. She advises clients on all taxation aspects of their financial affairs, including capital gains tax (CGT) and inheritance tax (IHT) planning, the use of trusts, offshore matters and claiming applicable reliefs. In particular, she has an interest in residence issues and the taxation of foreign domiciliaries.