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.

If an individual has a foreign domicile, liability is restricted to UK situs assets, including real estate, net of any allowable deduction for debts.

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 ATED-related CGT will also need to be considered.

If avoiding corporate ownership is not a possible (or desirable) planning strategy, then the use of mortgages can be used to reduce the chargeable estate, e.g. using a loan to acquire the UK property. Note that foreign debts (which are not secured on UK property) are to be offset first of all against non-UK situs property.

There are rules to limit the deductibility of certain debts. For example, loans to acquire excluded property (e.g. borrowing against a UK situs property and investing the proceeds offshore) will not be deductible against an individual’s estate. In addition, debts which are not discharged on or after death using funds from the estate or excluded property will not be taken into account when calculating the net estate unless there is e.g. a real commercial reason and tax avoidance is not one of the main purposes of leaving the debt outstanding.

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