Do you have an unforeseen exposure to UK inheritance tax?

In the last couple of years, there have been a significant number of changes to the tax rules in the UK, which have resulted in a widening of the scope of UK inheritance tax.

From 6 April 2017, individuals who have been UK resident for at least 15 of the previous 20 tax years are deemed to be domiciled in the UK for tax purposes. As a result, not only do they cease to be able to access the remittance basis of taxation, but their worldwide assets also fall within their estate for UK inheritance tax purposes.

If a deemed domiciled individual leaves the UK, where this occurred after 6 April 2017, then their worldwide assets will remain within the scope of UK inheritance tax for three years following their departure. In addition, there is no requirement for that individual to be UK tax resident during their sixteenth year in order to be treated as deemed domiciled at that point for UK tax purposes.

To avoid their worldwide assets falling within the scope of UK inheritance tax, that individual would need to cease being UK tax resident during their fourteenth year of residence in the UK.

One of the most significant changes that has come into effect is where UK residential property is held by an overseas company, and the shares in that company that are attributable to the UK residential property will be treated as a UK situs asset. As a result, UK residential property which is held in this way is no longer outside the scope of UK inheritance tax. This includes UK residential property which is held via an offshore trust which holds shares in an underlying company. In addition, there are further serious tax implications where the settlor of that trust continues to have use of the property.

Another change is where any such UK residential property is sold, the sale proceeds will continue to be regarded as a UK situs asset for two years following the date of sale, even if the proceeds are held in cash overseas.

The same applies to loans which have been made to finance the acquisition, maintenance or enhancement of value of UK residential property, directly or indirectly. Any such loans will be deemed to be a UK situs asset, and will therefore be subject to inheritance tax in the hands of the creditor.

This can be a serious issue for trustees, especially where a loan has been made to a beneficiary who uses these funds to acquire, maintain or enhance a UK residential property without informing the trustees.

Please read our latest factsheet or contact us for more information on these changes.