Inheritance Tax on UK Real Estate ("IHT")

Liability to UK inheritance tax turns not on residence but on domicile.

An individual is subject to IHT on his/her worldwide assets if s/he is domiciled (or deemed domiciled) in the UK, irrespective of where that individual was resident at the time of their death.

If an individual has a foreign domicile, liability is restricted to UK situs assets, including real estate, net of any allowable deduction for debts. Again, this applies irrespective of that individual’s residence position at the time of their death.

With regard to commercial property, currently the best way for investors abroad and offshore trusts to avoid exposure to IHT is to hold the UK assets through offshore holding companies, for then the relevant asset for IHT purposes is the shareholding in the offshore company. However, it should be noted that if the company makes a transfer of value of the UK assets, it can be apportioned to the company’s shareholders, regardless of their domicile status. If the UK asset is a high value residential property the impact of ATED and NRCGT will also need to be considered.

If avoiding corporate ownership is not a possible (or desirable) planning strategy, then mortgages can be used to reduce the chargeable estate.

Insurance against a potential IHT liability can be a cost effective strategy, particularly for younger investors.

On 19 Aug 2016, updates were announced to the proposed reform of the taxation of non-doms and it should be noted that offshore holding companies shall no longer be effective IHT shelters for UK residential properties from 6 April 2017. Investors in UK residential property should instead consider the use of loans or life insurance to mitigate any potential IHT liabilities. The effectiveness of existing corporate structures as IHT shelters should also be reviewed in light of this significant change.

Contact us here if you would like more advice on your tax affairs.