Owning a residential property in the UK can leave a liability to UK inheritance tax (IHT) when the owner dies, reducing the amount of money available to their family or heirs.
To remove any exposure to IHT, many non-UK domiciles who wanted to buy a UK residential property did so through overseas companies. As IHT was not charged on assets held in overseas corporate structures, it was not an issue, so this solution kept the property away from IHT.
Prior to becoming deemed UK domiciled, which before April 2017 was when an individual was UK resident for 17 out of 20 tax years, they could place the shareholding in the overseas company in an excluded property trust. The shares would be a non-UK asset and therefore be excluded property, again sheltering it from IHT, even after the settlor became deemed UK domiciled.
Over recent years, the UK government has begun making ownership of property in this way much more onerous, so much so, that the use of overseas companies may not be the best way forward.
IHT and domicile status
The taxation of non-UK domiciles and those who are UK domiciles, or deemed UK domiciles, differs.
A non-UK domicile will pay IHT on their assets situated in the UK. From 6 April 2017, once a non-UK domicile has been resident in the UK for at least 15 out of the previous 20 tax years, they will be deemed UK domiciled and, with some narrow exceptions, IHT will apply to their worldwide assets, the same as a UK domicile. This can lead to a significant rise in the amount of IHT their estate may have to pay.
Corporate ownership of residential properties
In recent years the UK government has tried to make owning a UK residential property through a company structure less attractive. The measures that have been introduced include:
- A higher rate of Stamp Duty Land Tax (SDLT). When buying residential property personally, SDLT is payable on a tiered basis with the highest rate being 12%, chargeable on the portion of the purchase price above £1.5m. If the property is being purchased by a company, then a flat rate of 15% is payable on properties costing more than £500,000.
- The Annual Tax on Enveloped Dwellings (ATED). This was introduced on 1 April 2013, chargeable to non-natural persons that own UK residential properties and is payable annually on ownership or part-ownership of properties valued at £500,000 or more. The rates are tiered with the highest tier being £220,350 (tax year 2017/18) for properties valued at more than £20m. The amounts payable increase each year in line with CPI.
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ATED-related Capital Gains Tax (AR CGT). Where a property is subject to the ATED regime and any capital gains are realised, the gains made from 6 April 2013 are chargeable to AR CGT at a rate of 28%. Any gains achieved before that time would have been achieved by the company and therefore subject to corporation tax if the company is taxed in the UK. If the company is taxed overseas then it will depend on the jurisdiction in which it is tax resident.
