The rules from 6 April 2017 add further complications to residential property ownership. The UK government will charge IHT on the death of an individual who holds shares in a company that owns a UK residential property, based on the value of the shares that represent the underlying property.
UK residential property will also cease to be treated as excluded property so, if any shares are held through an excluded property trust, the shares that represent the value of the UK property will not be excluded property. This could have implications for trusts as periodic charges could be due on ten-year anniversaries and there could be exit charges on distributions to beneficiaries.
With these potential tax charges building up, it can be beneficial for many individuals to own UK residential property personally rather than through corporate structures. Whilst this can reduce exposure to SDLT, the ATED and AR CGT, it does not remove the exposure to IHT, which the use of overseas companies was designed to achieve.
Solving the IHT problem
The potential tax on death will still be seen by many as the biggest issue; however, a solution to this problem is to insure the IHT liability with a suitable life assurance policy under trust. Not only could this be more cost-effective by removing or reducing exposure to other UK taxes and the costs and work associated with running an overseas company, but it is also a simple option.
A life assurance policy can be written on the life of the individual and on death, providing the premiums are maintained, this can produce a lump sum for the beneficiaries, who can then use it to mitigate any potential IHT liability. Any policy should be written under a suitable trust, meaning that the proceeds are paid to the beneficiaries, via the trustees. These beneficiaries could be those who will benefit from the estate and who would effectively suffer due to the tax payable on the estate.
If the UK property was sold during the individual’s lifetime, then the property would cease to be chargeable to IHT. Unless the proceeds remain in the UK, the premiums can cease and the life policy allowed to lapse. However, if the individual was to become deemed UK domiciled, then the cover may still be attractive as they will then have to pay IHT on their worldwide assets and the sum assured could remain valuable.
For remittance basis users, the use of a non-UK insurer may be attractive. If they have sufficient foreign assets to justify the remittance basis charge, then it may be attractive to fund any policy using non-UK money. It would be cleaner to use foreign capital rather than foreign income and gains to fund the policy as, if the sum assured became payable and was brought to the UK, there could appear to be a remittance, in which case the derived remittance would equal the premiums paid to the extent they had been paid from foreign income and gains.
