Property prices in the south-east of England, and especially London, can make owning a residential property a lucrative exercise.
Wealthy non-UK residents look to London property for three main reasons: as a buy-to-let investment; to accommodate family members such as students or returning expats; or as a London base for work and holidays. It has been suggested that more than 70% are bought as an investment and to rent.
Recent figures also show that a third of new homes in the prime central London boroughs of Westminster, Kensington & Chelsea and the City were sold abroad.
Tax liability
As the owners may not be resident in the UK they might not appreciate the impact of inheritance tax (IHT). Individuals who own UK property will be liable to UK IHT even if they are non-UK resident and not domiciled in the country.
IHT in the UK is mainly linked to domicile and a non-UK domicile will pay tax on any immoveable assets based in the UK. This, by definition, will include any UK property.
If these individuals become UK resident then once resident in the UK for 15 of the previous 20 tax years, they will be deemed UK domiciled and be taxed accordingly, paying UK IHT on their worldwide assets.
Wealthy individuals who own a UK property, even if they do not become deemed UK domiciled, could leave a significant tax liability to their family when they die.
In the UK everyone is entitled to a nil-rate band of £325,000 ($430,000, €381,000) and a residence nil-rate band of £125,000. After this everything is taxed at 40%, unless at least 10% of the net estate is given to charity, in which case they would benefit from a reduced rate of 36%.
Using the 40% rate, consider an individual who owns a property in London that is valued at £5m. On their death they would potentially leave an IHT liability of more than £1.8m, which would need to be paid before the assets can be passed on to the heirs.
Corporate ownership
In the past, many non-UK domiciles created an overseas company to buy the property, because IHT was not charged on assets held in overseas corporate structures. In recent years, however, the UK government has made ownership of property in this way much more onerous and expensive.
Company-owned properties can be subject to higher rates of stamp duty than personal ownership, the annual tax on enveloped dwellings (ATED) may be payable and ATED-related capital gains tax could apply.
In addition to these taxes, the UK government now charges IHT on the death of an individual who holds shares in a company that owns a UK residential property. The value used for the tax is the value of the shares that represent the underlying property.
Taking corporate ownership a stage further and using trusts to hold the shares in the overseas company that owns the property means the shares that represent the value of the UK property will not be excluded property and potentially subject to tax.
As the taxes and costs associated with holding a property in a trust and corporate structure can now be unattractive, many consider owning the property personally. This means they must find alternative ways of meeting the IHT liability.
Insurance cover
The easiest alternative is to insure the potential IHT liability.
Take the example of the case study: a property worth £5m owned by a non-resident, non-UK domiciled individual. The owner could insure their life for £1.8m with a policy designed to pay out to their family on death.
An insurance company would then provide a lump sum to cover the potential IHT liability. The cost of cover could vary depending on state of health, lifestyle, country of residence and so on, but could be significantly cheaper than the various taxes and fees associated with more complex and convoluted ways of owning a property. It would also be much easier to explain to family members.
The use of a suitable trust could ensure the sum assured is paid out quickly and without any unnecessary taxes, but this would depend on the policyholder’s country of residence.
Remittance basis
For those not resident in the UK, or who opt to use the remittance basis, the use of a non-UK insurer may be attractive. If the individual has sufficient foreign assets to justify the remittance basis charge, then they can fund any policy using unremitted funds.
If the sum assured became payable and was brought to the UK there may 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.
As the remittance basis user would have died prior to the remittance being made, there is a question of who would have to pay any tax, especially if the sum assured was remitted in the tax year following the death.
Looking at HMRC’s Residence, Domicile and Remittance Basis Manual, section RDRM33600 states that: “Foreign income and foreign chargeable gains of a remittance basis user that arose or accrued before his or her death but which are brought to the UK after the date of his or her death will generally not be regarded as a taxable remittance.”
On this basis, the lump sum may not be taxed when being remitted anyway; but it is important to clarify the tax position when considering any remittance to the UK.
Life assurance
A life assurance solution also provides simplicity if the property is disposed of during the individual’s lifetime. If the property is sold and the proceeds moved away from the UK, the IHT liability would fall away. Any life assurance would therefore be surplus to requirements, the individual could cease the premiums and the policy would lapse.
Sometimes simplicity is the most suitable solution – and life assurance is certainly more straightforward than some more complex financial arrangements.
Further reading:
Asian investors in London property risking hefty IHT bills
By Neil Jones, market development manager, Canada Life
