London, perhaps more than any other
major city in the world, is seen as a safe haven and an attractive destination
for high-net-worth individuals.
When acquiring UK residential
property, depending on the level of investment, it was common practice for
foreign investors to use structures to reduce their tax exposure; initially to
stamp duty land tax (SDLT) and ultimately to UK inheritance tax (IHT), which is
charged at a rate of 40% on any amount above the ‘nil rate band’ of £325,000.
Indirect ownership also offered increased confidentiality by keeping an
individual’s name off the UK Land Register.
Typically, a property would be
purchased using a vehicle such as an overseas company, partnership or trust,
but recent legislation means such structures are generally no longer effective
for IHT planning. From 6 April 2017, non-UK domiciles holding UK residential
property indirectly through overseas corporate structures were brought within
the scope of UK IHT. The new rules apply retroactively to property holding
structures set up before the legislation took effect.
The UK government has also
brought in a package of measures designed to make it less attractive to hold
high-value UK residential property indirectly. Residential property valued at
more than £500,000 attracts a higher rate of stamp duty land tax (SDLT) of 15%
if acquired by ‘non-natural persons’ and is also then liable to the annual tax
on enveloped dwellings (ATED) on an ongoing basis.
The new Economic Crime
(Transparency and Enforcement) Act 2022, which was passed in March this year,
will further introduce a public register of the beneficial owners of overseas
entities (expressly including companies and partnerships) that own property in
the UK.
Domicile
Under English common law, every
individual is born with a ‘domicile of origin’, which generally follows the
domicile of their parents at the time of their birth. Domicile is unrelated to
the concept of residence or nationality. It is possible for an individual to be
resident in one country, domiciled in a second country and be a national of a
third.
As a result, many British
expatriates, even those who have resided in another country for decades, still
find themselves – often unknowingly – UK-domiciled and therefore subject to IHT
on a worldwide basis. The only way to shed a UK domicile of origin is to
acquire a ‘domicile of choice’ in a different country, which involves moving to
that country, establishing a clear intention to reside there permanently or
indefinitely, and adequately severing ties with the UK.
If a person has succeeded in
acquiring a domicile of choice in a new country but subsequently abandons their
permanent home or indefinite residence there, they will automatically revert to
their UK domicile of origin until such time as they have demonstrably acquired
another domicile of choice.
For non-UK nationals that own
property in the UK, the issues are different. An individual with a non-UK
domicile of origin can generally preserve his/her non-UK domiciled (non-dom)
status for a long period after becoming UK resident, which means he/she is only
subject to IHT in respect of UK assets. However, this tax benefit is removed by
the acquisition of ‘deemed domiciled’ status, which is typically acquired at
the beginning of the sixteenth tax year of UK residence.
Deemed domiciled status means
that the scope of IHT extends from UK assets to all assets on a worldwide
basis, but the impact can be greatly reduced by ensuring that non-UK assets are
placed into a non-UK resident trust – known as an ‘excluded property
settlement’ – before the status is acquired. This will ensure that non-UK
assets remain outside the scope of UK IHT.
Disposal by sale or gift
This is generally the only
realistic option for British expats who are seeking to shed their UK domicile
of origin, because retaining UK residential property may risk undermining any
acquisition of a domicile of choice in another country.
It is important to remember
that gifts to individuals are considered as ‘potentially exempt transfers’ for
UK tax purposes. This means that they will only be tax-free if the donor
survives for at least seven years after making the gift (the ‘seven-year
rule’). It is also important to remember that if the donor continues to derive
benefit from the asset, the gift will be subject to IHT under the ‘Gift with
Reservation of Benefit’ rules (GWROB).
Insurance
For those investors who do not
wish to sell or gift a UK property, the only remaining viable alternative for
protecting against IHT is insurance. In its simplest form, life insurance is a
contract that offers the policyholder liquidity in the form of a cash payment
when they need it most.
The beneficial owner can take
out a ‘permanent’ life insurance policy to cover the full amount of IHT. The
beneficiaries can then use the proceeds of the policy to pay any IHT liability
that becomes due. This is a tried and tested method of funding a potential IHT
liability where other succession planning is not available.
To avoid the proceeds of the
policy also incurring IHT, it is essential that the policy should be written
into trust. This will ensure that the proceeds can be paid to the beneficiaries
outside of the estate for IHT purposes and will also avoid any probate or
forced heirship rules that may apply.
Premiums will vary considerably
for many reasons, so it is best to use an adviser in the private client space,
such as Sovereign Group, to find the best solution to match for your personal
circumstances.
For more guidance contact
Sovereign Group on:
serviceinfo@sovereigngroup.com
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