UK and International Tax news

Tax Changes Affecting UK Residential Property From April 2017

Friday 16th February 2018

HMRC has recently published further guidance on tax changes affecting UK residential property which came into effect on 6 April 2017.

From 6 April 2017 new rules extend the scope of IHT to all residential properties in the UK that are owned by non doms via companies whether UK resident or not. These changes also apply to persons who lend money or provide security for the purchase of UK residential property. Such loans will be subject to IHT in the estate of the lender, regardless of the lender’s residence and domicile position.

Prior to 6 April 2017, IHT applied only in respect of UK residential properties owned directly by non doms. Properties held through non UK close companies, and overseas partnerships, were not subject to IHT as such assets were treated as excluded property for IHT purposes.

Excluded property for IHT purposes includes foreign property owned by non domiciled individuals, or trustees of a settlement where the settlor is not non UK domiciled at the time the settlement was made.

Before the 6 April 2017 this type of property was not included in the estate of a deceased individual and is not relevant settled property for the purposes of, for example, the ten year anniversary charge.

From 6 April 2017 the new rules limit the availability of excluded property relief for IHT if the open market value of particular types of foreign assets is attributable to a UK residential property interest which consists of or includes a dwelling. A foreign asset includes a right or interest in a close company, and an interest in a partnership. The new rules bring these foreign assets and the value of that property within the scope of IHT.

Relevant loans used to finance the acquisition, maintenance or enhancement of UK residential property made by an individual, or trustees or partnerships will not be excluded property in the hands of the creditor who will be treated as a participator and therefore the holder of an interest in the company that owns the UK property.

There is a two year restriction on the availability of excluded property relief for the disposal proceeds or any property representing those proceeds if a person or trustee disposes of partnership interests or participator’s rights, shares or loans or receives a repayment of a relevant loan.  This however does not apply to a disposal of the UK property itself and the loan repaid because the loan stops being a relevant loan when the UK property is sold and so the repayment is not for a relevant loan.  The amount restricted is the lower of the value at the date of disposal (or repayment) and the value at the date of charge.

From 6 April 2017, IHT will also be chargeable on enveloped dwellings or relevant loans where either no tax is charged in a non UK territory on a transfer of value or there is a tax charge but its effective rate is 0%.

In addition, where IHT is not paid in respect of an enveloped property, HMRC can register a charge against the property at HM Land Registry, even though the property itself is owned by a company or partnership and not directly by the non dom or trustee.

With effect from 6 April 2017, a new targeted anti-avoidance rule applies to arrangements entered into for the sole or main purpose of avoiding or to minimise the effect of the legislation.

If you would like further information on the latest guidance, please contact Keith Rushen on 0207 486 2378.

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