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5 March 2018
Non UK resident commercial property investors IHT
General – Non UK resident commercial property investors IHT
IHT is tax that is primarily focused on one’s domicile position as opposed to one’s residence for tax purposes. However, that said, IHT will be an issue for a non-resident investor in UK commercial property.
However, escaping its clutches is less likely to be an issue for commercial property investors than it is for residential property investors. For the time being anyway!
The general rule is that if one is domiciled in the UK then one is liable to UK IHT on one’s worldwide assets.
Where an individual is non-UK resident at the point of death then this is largely irrelevant. Of course, the clever clogs among you will be aware that residence naturally feeds in to one’s domicile position so one cannot discount it totally.
Where a person who has a domicile of origin in the UK, unless he or she intends to reside in a particular jurisdiction outside the UK indefinitely and backs up that same intention with physical residence in that particular jurisdiction, then they will remain UK domiciled.
In these circumstances, it is probably more likely that our potential investors started off with a domicile of origin outside of the UK. Where one is non-UK domiciled then the starting point is that one is only subject to IHT on UK assets only. In these circumstances, a person’s non UK assets will remain outside the UK’s clutches.
Deemed domiciled position for IHT purposes.
However, this position for non doms has for many years existed for a finite window.
Prior to the introduction of new rules that took effect from April 2017, a non-dom would become ‘deemed domiciled’ for IHT purposes only if he or she had been resident in the UK for 17 out of 20 tax years.
Under the recent reforms to rules, this long stop date has been shortened to 15 out of 20 tax years.
It should be noted that this does not affect a person’s domicile status at general law.
In addition to this, and corresponding with the old law, there is an IHT ‘tail’ meaning that one will remain deemed domiciled for three years even if one has upped sticks and moved overseas.
Former or returning UK domiciled resident
A new actor was introduced to the cast of non dom terminology with effect from 6 April 2017. This would very much be the pantomime villain as they are singled out for special, and negative, attention by HMRC. It is sometimes known as the “(Stuart) Gulliver clause”
Such taxpayers will get a one year ‘grace period’ on re-entering the UK before they are ‘fast-tracked’ to deemed domicile status in the second year of residence. In other words, they do not have the 15/20 period.
If you are in this class of taxpayer and thinking about returning to the UK then take care (and advice).
Excluded property – Non UK resident property investors IHT
For non doms and for non residents investing in UK property, the ‘go to’ structure has been the non-UK excluded property trust.
The model was relatively simple. It would typically involve a non-UK trust being established which would hold the shares in an underlying non-UK company.
This Company would then invest in various assets. This could of course include UK residential property and, in many cases, would also hold the UK main residence.
To be effective, the structure needed to be created before the individual became deemed domiciled for IHT purposes in the UK. Where was the case, then the assets held in this ‘wrapper’ would be protected from UK IHT on an ongoing basis – even after the settlor of the trust subsequently became deemed domiciled in the UK for IHT purposes.
Even UK assets were protected from the IHT charge. As such, one might reasonably say that the effect of the structure was that it essentially transformed UK assets in to non-UK assets for the purposes of IHT.
This is the Inheritance Tax equivalent of alchemy for a non dom.
The changes to the definition of excluded property for IHT purposes
Important changes to the definition of excluded property took affect from the introduction of the new non dom rules.
In simple terms, the aim of the new rules was to exclude UK residential property from qualifying as excluded property.
In other words, it did not matter how deeply the residential property was buried in an overseas structure, if it value could be traced back to UK bricks and mortar it would fall within the estate of someone, or some persons, who had a beneficial interest in the assets.
As such, our commercial property investor friends can breathe a sigh of relief in this regard as the changes do not exclude commercial property from qualification.
It should be noted that one cannot just sell the residential property and reinvest in commercial at relevant times as the residential property being sold will effectively retain its residential character for two years.
Conclusion – Non UK resident commercial property investors IHT
So, for the time being at least, for our non UK resident commercial property investor it is business as usual. He or she may create and benefit from excluded property as before.
However, one should not be surprised if the mission creep we have seen in other areas starts encroaching on commercial property.
Articles in this series on Non UK resident commercial property investors tax are as follows:
If you have any queries on non UK resident commercial property investors IHT, or any other matters, then please get in touch