Proposed changes in the Finance Bill 2017 bring offshore close companies and partnerships into the charge to IHT to the extent that the value of the “right or interest” (e.g. shares or debt) is “directly or indirectly attributable to a UK residential property interest”.
Thus individuals, even if non-domiciled and non-resident, holding shares in an offshore company which itself owns UK residential property, will be liable to UK IHT at 40% on any excess above £325,000.
Note that this applies only if the company is a close company (broadly a company controlled by five or fewer participators and no one shareholder having a right to more than 10% on a liquidation). Note that the definition of participator includes loan creditors of the company as well as shareholders.
Loans from connected parties should (under current draft legislation) be deductible against the value of the UK residential property subject to existing anti-avoidance provisions.
There are three scenarios:
Non-Resident Non-Domicile
The options available to a non-UK resident non-domiciled owner of UK residential property are:
to do nothing in which case a liability will arise which may be covered by insurance; or
make a lifetime gift to a trust. Transfers before 6th April 2017 are not subject to a lifetime charge though will be subject to IHT periodic and exit charges over the life of the trust.
UK Resident but not Deemed-Domicile for IHT
The options available to a UK resident who is not deemed domicile for IHT are:
UK Resident and Deemed-Domicile for IHT
The options available to a UK resident who is deemed domicile for IHT are:
to do nothing in which case a liability will arise which may be covered by insurance; or
make a lifetime gift to a trust from which the donor is excluded from benefit. This will be treated as a PET (potentially exempt transfer) and there will be no IHT liability if the gift is survived by seven years.
Note that even if the donor is excluded, as the trust is discretionary and relates to UK relevant property, IHT periodic and exit charges will still apply over the life of the trust.
Note that in respect of any gift, for the gift to be effective for IHT, the donor must not retain any benefit otherwise a liability to IHT will remain under the gift with reservation of benefit (GROB) rules.
Irrespective of the scenarios above, any transfer to a discretionary trust made after the 6th April there will be an ingoing lifetime charge at the rate of 20% unless the donor is excluded and survives seven years.
Notes
(i) as the property (the shares in the offshore company or partnership interest) becomes “relevant property” the value of the trust fund (so far as it is represented by UK residential property) is subject to IHT periodic and exist charges at a maximum of 6% every ten years and an exit charge on monies taken out of the trust and
(ii) as the property (the shares) become “relevant property” the liability arises to IHT even in respect of a person who is non-UK resident and non-domiciled.
Bourse 2017 Nom-Dom Solution
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