Find out about changes to enveloped UK dwellings and related finance from 6 April 2017.
Enveloped UK residential property - excluded property
Excluded property for Inheritance Tax includes foreign property:
- you own if you’re non-domiciled
- owned by the trustees of a settlement, if the settlor isn’t non-UK domiciled at the time the settlement was made
Before the 6 April 2017 this type of property wasn’t included in the estate of a deceased individual and isn’t relevant settled property for the purposes of, for example, the 10 year anniversary charge.
From 6 April 2017 the new rules limit the availability of excluded property for Inheritance Tax if the open market value of particular types of foreign assets is attributable to a UK residential property interest (UK RPI).
A UK RPI is an interest in UK land which consists of or includes a dwelling.
Types of foreign assets are:
- a right or interest in a close company
- an interest in a partnership
The new rules bring these foreign assets and the value of that property within the scope of Inheritance Tax.
Lee isn’t domiciled or resident in the UK and never has been. He owns the entire share capital of a Jersey company, whose sole asset is a leasehold flat in London. The open market value of the shares is £2 million.
Before 6 April 2017 this would have been excluded property because the shares aren’t located in the UK and Lee is non-domiciled. There wouldn’t have been an Inheritance Tax charge if Lee had gifted those shares or had retained them (and his foreign domicile) until his death.
From 6 April 2017 the shares are no longer excluded property and because the value of the shares is wholly attributable to a UK RPI the full value of £2 million is within the scope of Inheritance Tax.
However if the company had other assets that were the same as the UK RPI then the amount attributable to the UK RPI would be halved, and only £1 million (half of the open market value of the shares) would be within the scope of Inheritance Tax.
If Lee gifts the shares or dies after 6 April 2017 then a lifetime charge or a charge on death may arise subject to available reliefs or exemptions.
The new rule also extends to UK RPI owned indirectly through other close companies and partnerships. So, if the Jersey company didn’t own the UK RPI directly, but indirectly through a stake in another company (who owned the UK RPI) the new rule still applies.
If Lee’s stake in the company is too small (that is, less than 5% when combined with the stakes of persons connected to him) then the new rule won’t apply.
Relevant loans - excluded property
Relevant loans to finance the acquisition, maintenance or enhancement of UK RPI are made by:
If they’re foreign loans they can’t be excluded property in the hands of the creditor.
Loans to companies aren’t relevant loans but are still within the scope of the new rules, because the creditor will be a participator (and therefore the holder of an interest) in the company that owns the UK RPI.
Carlos isn’t domiciled in the UK. He lends £1 million to his student daughter Isabella, and she uses the money to purchase a £1.1 million house in Oxford. If Carlos dies then the value of the loan will form part of his estate, even if the loan is structured as a foreign asset. Isabella has no other assets in the UK or elsewhere and her net estate is initially £100,000 (£1.1 million less the £1 million loan).
A relevant loan extends to money or money’s worth held or otherwise made available as security, collateral or guarantee. The value used is the lower of the value of the loan or the security, collateral or guarantee.
If the loan to Isabella had been made by a bank which had received a right over £2 million of Carlos’ assets then such collateral can’t be excluded property. The value is capped to the value of the loan, which is £1 million.
If the owner of the UK RPI disposes of the property then the loan stops being a relevant loan. So, if Isabella sells the house then Carlos will no longer have a relevant loan.
Disposals of company or partnership interests, relevant loans and repayments of relevant loans
There’s a 2 year restriction on the availability of excluded property for the disposal proceeds or any property representing those proceeds if you or a trustee:
- dispose of partnership interests or participator’s rights (or shares) or loans
- receive a repayment of a relevant loan
This doesn’t apply to a disposal of the UK RPI itself, if it’s sold and the loan repaid. That is because the loan stops being a relevant loan when the UK RPI is sold and so the repayment is not for a relevant loan.
The amount restricted is the lower of the value at the date of disposal (or repayment) and the value at the date of charge.
Alice isn’t resident and not domiciled in the UK. She has an interest in a foreign close company, whose value is wholly attributable to UK RPI. In January 2018 she sells her stake in the company for the open market value of £1 million, which is deposited in her Jersey bank account.
She then invests the proceeds in land in Spain. In November 2019 she gifts the land to her children at its value of £1.2 million. The gift isn’t excluded property because it’s derived from the proceeds of the disposal of her stake in the company and the disposal was made in the 2 year period.
It’s a potentially exempt transfer by Alice and the value transferred is capped at £1 million.
There’s no Inheritance Tax charge on the ending of the 2 year period when the property can be excluded property again.
Other changes to Inheritance Tax
Double taxation arrangements
From 6 April 2017 HM Revenue and Customs (HMRC) will still charge Inheritance Tax on enveloped dwellings or relevant loans where either:
- no tax is charged in a non-UK territory on a transfer of value
- there’s a tax and its effective rate is 0%
Inland Revenue Charge
From 6 April 2017 the charge for unpaid Inheritance Tax extends to enveloped UK dwellings.
If Inheritance Tax isn’t paid HMRC can register a charge against the property at HM Land Registry, even though the property itself is owned by a company or partnership and not by you or a trustee.
Targeted anti-avoidance rule
From 6 April 2017 there’s a new targeted anti-avoidance rule (TAAR) for arrangements entered into for the sole or main purpose of avoiding or to minimise the effect of the legislation.
From 6 April 2017 any property that was previously excluded may now no longer fall into that category.
The disposal rules only apply to disposals on or after 6 April 2017.
There’s short-term transitional relief for chargeable events affected by the new measures. The relevant date for the delivery of an account and the due date for interest will be the later of the:
- current statutory date
- end of the month following Royal Assent
Royal Assent was granted on 16 November 2017, so if there was a chargeable event in April or May 2017 and the due date for payment of Inheritance Tax was 31 October or 30 November 2017 then the due date is extended to 31 December 2017.
Technical guidance and examples about these changes are available in the Inheritance Tax manual.