The proposals
The consultation and accompanying draft legislation proposes that, effective from 6 April 2017, the value of an overseas corporate structure that is made up in whole or in part by virtue of an interest in a UK ‘dwelling’ will no longer be excluded property.
Unlike ATED, there will be no minimum value threshold, and no exemption for property that is let out, so its impact will be felt by significantly more people than ATED.The new rules will include the value of any UK residential property held indirectly for IHT purposes on the occurrence of certain ‘chargeable events’, including:
- the death of an individual holding shares in an overseas close company that owns UK residential property;
- the redistribution of the share capital of an overseas close company that owns UK residential property;
- the death of a donor making a gift of shares in a close company that owns UK residential property where that gift was made within seven years of death;
- a gift made by a non-domiciled individual of shares in a close company owning UK residential property;
- the death of a donor or settlor who benefits from a gift of UK residential property or of shares in a close company that owned such property within seven years of death;
- any 10-year anniversary of a trust holding UK property through an offshore company; or
- the death of a life tenant with a pre-March 2006 qualifying interest in possession in a trust from which they have an entitlement to income.
In most instances, it will be the death of a shareholder that will trigger an IHT event. However, it will also impact on property held offshore that is in turn owned by trustees. If general IHT principles apply, it will mean trusts may suffer the following different types of IHT charge:
- IHT on the transfer of the company shares into a trust;
- IHT on the death of the settlor within seven years of the creation of the trust;
- IHT on every 10th anniversary of the trust;
- IHT if the interest in the UK property is distributed from the trust; and
- IHT on the death of the settlor, if he is a beneficiary of the trust.
Law enforcement
A question many individuals may have is how HMRC intends to enforce the law, especially as there is no need currently to disclose the underlying beneficial ownership of an offshore company in these circumstances. The consultation document proposes a change whereby an indirectly owned UK residential property cannot be sold until HMRC is notified and any outstanding IHT liabilities are settled.
In addition to this, the UK government is also consulting on the introduction of a requirement for beneficial ownership of overseas companies to be disclosed before they can purchase property in England and Wales, and to extend the requirement to register beneficial ownership to overseas companies that already own UK property (almost 100,000 in England and Wales).
Taking action
So what can individuals do now, and should they consider removing the property from the structures they have put in place (so called de-enveloping)?
With ATED, ATED-related CGT, non-resident CGT and the prospect of IHT, there is now a case to de-envelope, so that it is owned by the individual directly. Savings could be made as ATED will no longer apply and there would no longer be any running costs associated with operating a company or trust structure.
