All Change? IHT And Owning UK Property Through An Offshore Entity

Liability to inheritance tax (IHT) broadly depends on a person’s domicile, and on where the person’s assets are situated. 

For a UK domiciled (or deemed domiciled) individual, IHT is levied on worldwide assets, whether the individual is resident in the UK or not. Thus, for example, a UK domiciled individual who has lived in the UK for many years but decides to retire abroad (e.g. to Spain) will remain subject to IHT on lifetime gifts of, and on death on, worldwide assets.

It is sometimes suggested that IHT can be avoided if UK assets (e.g. a UK house or flat) owned by a UK domiciliary are held via an offshore entity. Thus, for example, the individual may be advised to set up a company outside the UK (e.g. the BVI), which then owns the UK property. This simple structure does not work as the shares owned by the individual in the offshore company (whose value reflects the value of the underlying UK property) fall within the IHT charge. Alternatively, an offshore trust (instead of or in addition to an offshore company) is sometimes suggested to hold the UK property. Again, however, IHT charges are not avoided.

It is also worth noting that such offshore structures, for the UK resident domiciliary, can have significant adverse income tax and capital gains tax (CGT) consequences including (for example) a loss of private residence relief for CGT purposes.

The IHT position for the non-UK domiciliary is very different. Non-UK domiciliaries are only liable to IHT on UK (not worldwide) assets, which include, for example, a UK house or flat. The UK situs of the UK property can however be altered by placing the property in an offshore company. The property then held by the non-UK domiciliary is not the UK property itself, but the shares in the offshore company which are non-UK situs and thus no longer fall within an IHT charge whether on making a lifetime gift or on death. Technically, such shares fall to be treated for IHT purposes as ‘excluded property’.

However, on 8 July 2015 the government announced that, from April 2017, it intends to bring all UK residential property held directly or indirectly by foreign domiciled persons into charge for IHT purposes, even when the property is owned through an indirect structure such as an offshore company. In short, from April 2017, non-UK domiciliaries will not be able to use an offshore structure to hold UK residential property and avoid an IHT charge thereon.

It should also be noted that a significant proposal has also been made by the government under which, from April 2017, for those non-UK domiciliaries who in the tax year 2017/18 will have been resident in the UK for 16 tax years or more out of the last 20 tax years they are to be ‘deemed UK’ domiciled, not only for income tax and CGT purposes, but also for IHT purposes. Hence, for such individuals, liability to IHT will be on worldwide (not just UK) assets.

UK main residence or investment property

The above discussion in principle applies whether the UK property is a main residence or simply an investment (e.g. buy to let) property.

It may be worth adding that the introduction of the annual tax on enveloped dwellings (so-called ATED), a related ATED-gains charge on disposals and higher stamp duty land tax rates on acquisition have made holding UK residential property worth more than £1 million through offshore companies extremely unattractive. It therefore becomes necessary to weigh up any possible IHT advantages against these new levies.

A UK domiciled resident individual should in most situations avoid the use of an offshore entity to hold UK property, although for a non-UK domiciliary an offshore entity could be considered, but note of the proposed changes from 2017 should be taken into account.