**On the 25 April 2017 the UK Chancellor announced the removal of some significant clauses within Finance Bill (No2) 2017 which affects the content of this article. Any references to changes to be introduced April 2017 should be considered on-hold until further notice. This article will be updated once the final position is known**
The UK Treasury issued a consultation paper outlining changes to the inheritance tax (IHT) treatment of UK property held within offshore structures on Friday 19 August 2016. Changes will apply from 6 April 2017.
The consultation paper describes measures to ensure UK property is always chargeable to UK IHT regardless of how it is owned. The paper also includes some responses from the September 2015 consultation ‘Reforms to taxation of non-domiciles’ as well as some proposals for changes to business investment relief.
Individuals who are non-domiciled in the UK currently enjoy a significant advantage over other domiciled individuals for IHT purposes. UK domiciled individuals are liable to IHT on their worldwide property. However, those who are non-UK domiciled are only liable on the property which is situated in the UK.
Any residential property in the UK owned by a non-domiciled individual directly will be within the charge of IHT. However, it is standard practice for such individuals to hold UK residential properties through an overseas company. Where this is the case, the property of the individual consisting of overseas company shares which will be situated outside the UK and are therefore excluded from IHT. This is known as ‘enveloping’ the UK property and the effect is that the property is taken outside the scope of tax.
The Government proposes to remove UK residential properties owned indirectly through offshore structures from the current definitions of excluded property within the Inheritance Act 1984. The effect will be that such UK residential properties will no longer be excluded from the charge to IHT. This will apply whether the overseas structure is owned by an individual or a trust.
The Government has confirmed that the change will be effective for all chargeable events which take place after 5 April 2017.
The need for life cover
It is worth considering the opportunities which may be available to help reduce the overall effect of IHT. There are planning opportunities available which should take into account the practicalities of paying IHT and releasing assets to beneficiaries of the deceased’s estate.
Life assurance policies can be used to help with IHT planning. Policies can be written in trust; the sum assured is paid into this trust and then does not form part of the deceased’s estate for IHT purposes. Using life assurance in this way helps ensure that the deceased’s family has available capital to pay the IHT liability which may arise, without having to arrange a loan or use their own funds.
The consultation closes on 21 October 2016 with legislation to be included within the 2017 Finance Act. View full details of the consultation.