IHTM04311 - Finance (No 2) Act 2017 changes: UK residential property
With effect from 6 April 2017, UK residential property owned indirectly by non-UK domiciled individuals (or by the trustees of trusts that they have created) together with related loan finance is brought within the scope of Inheritance Tax (IHT). The new rules are incorporated into the Inheritance Tax Act 1984 as a new schedule, Schedule A1.
Indirect ownership of UK residential property
Prior to these changes it was possible for non-UK domiciled individuals and trustees to avoid a charge to IHT by holding UK residential property interests (UKRPI) through an offshore vehicle, such as a company incorporated outside the UK. The company shares, being a foreign asset were classified as excluded property (IHTM04251) and so were not within the scope of IHT.
The new rules limit – by value - the availability of excluded property to the extent that the open market value of an interest in
- a foreign close company, or
- a foreign partnership
is directly or indirectly attributable to the value of UK residential property.
This rule does not apply to other UK or foreign assets owned by the offshore companies or partnerships. It is only the value of the company shares or partnership interest that is attributable to UKRPI.
For these purposes a UKRPI is defined as an interest in UK land which consists of or includes a dwelling or which subsists under contract for an off-plan purchase. These and other terms are defined in the new legislation or by reference to the non-UK resident capital gains tax legislation within Schedule B1 TCGA/92 (Taxation of Capital Gains Act.)
There are also specific definitions for close companies, derived from the Corporation Tax Act 2010 and for partnerships.
Loans and collateral related to UK residential property
In addition the following foreign assets can no longer qualify as excluded property
- loans (‘relevant loans’) used to acquire, maintain or enhance UK residential property and
- money or money’s worth held or otherwise made available as security, collateral or guarantee for relevant loans to the extent that they do not exceed the value of the loans.
There is more detail on both these measures in the pages beginning at IHTM04312.
There is also further technical guidance available. This guidance, published by external representative bodies, such as The Chartered Institute of Taxation and The Society of Trust and Estate Practitioners, is in the form of Questions and Answers, with comments by HMRC.