The appeal of property investment in the UK continues to attract a global audience. Yet, alterations in the taxation of UK residential property have resulted in significant implications for offshore entities. This article explores the changes, discusses the challenges for non-UK domiciled individuals, and suggests life insurance as a practical solution for mitigating tax liabilities.
The Taxation Shift
In the past, UK property owned by an offshore company, either by a non-UK domiciled individual (commonly referred to as a “non-dom”) or a trust established by a non-dom, was considered ‘excluded property’ and fell outside of inheritance tax’s (IHT) scope. However, as of April 6, 2017, the landscape has dramatically changed.
Legislation on Inheritance Tax
Whether held directly or indirectly by any person or trust, UK residential property is subject to IHT. This includes properties held through an offshore structure, such as a company. The legislation applies to both individuals who are domiciled outside the UK and trusts with settlors who are non-UK domiciled.
Key Takeaway: Even if the property is ‘enveloped’ and the owner of the offshore company is a non-dom, there is still a 40% liability to UK IHT.
The Effects on Non-UK-domiciled Individuals
The legislation represents a radical change for non-UK-domiciled individuals. Avoiding paying the UK IHT on UK residential property has become a substantial challenge.
Mitigating the Tax Liability
While it may be impossible to entirely eliminate the IHT exposure, there are some relatively straightforward ways to mitigate the tax liability:
- Gifting the property by way of a Potentially Exempt Transfer (PET) to the next generation
- Ensuring spouse exemption is available on the first death
- Investing in Term Life Insurance
- Securing a loan on the property to purchase or improve it
It’s important to note that the tax due will be on the value of the property at the time of death, or in certain cases, every ten years.
Life Insurance as a Solution
Term life insurance emerges as an inexpensive approach to mitigate the IHT liability. It offers flexibility to the owners, allowing them to remain on the property knowing that the IHT liability is effectively covered on the last death.
Let’s consider a hypothetical example of Mr. and Mrs. Van Schoonhoven, Dutch nationals living in Dubai, who purchase a property in London. To mitigate their IHT liability, they decide to take out Joint Life Second Death Life Insurance for 30 years.
The insurance cover is written in a simple form of discretionary trust for their children, from which Mr. and Mrs. Van Schoonhoven are excluded, although they can be trustees. If Mrs. Van Schoonhoven dies in the ten years after Mr. Van Schoonhoven’s death, a cash lump sum will be available to the children to pay the inheritance tax.
The Role of the UK Government
The UK government announced the introduction of a targeted anti-avoidance rule. It will effectively ignore any arrangements intended to sidestep the new legislation. Therefore, any proposal that suggests a way of avoiding the UK IHT charge will need to be examined very carefully.
While the legislation has introduced challenges for non-UK-domestic individuals owning UK property, there are still ways to mitigate the tax liability. Life insurance emerges as a practical solution, providing an effective way to cover the IHT liability and safeguard the property for future generations.
Key Takeaway: The changes in UK IHT legislation mean that non-UK domiciled individuals need to carefully consider their options when investing in UK property. Life insurance can provide an effective solution to mitigate the potential tax liability.
Those who are serious about protecting themselves financially, no matter what the future holds, should consult a professional independent financial planner. To ensure the safety of you and your loved ones, we at Expat Insurance will analyse your situation and recommend the most suitable investment strategy.
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