With many non-residents invested in UK residential property, tax changes may spoil their appetite. Rebecca Ellis of Pomona Wealth, a multi-family office giving advice on the equities market and family succession planning explains more
With a raft of new legislation being introduced by the newly appointed Conservative government led by David Cameron, UK residential property may have become significantly less attractive as a source of investment returns and store of value for non-UK individuals.
For the last 20 years, London has had a property boom with property prices increasing an average of 22.7 % per annum and a whopping 454% in value.i If you bought a medium value property for 123,054 GBP (31.5 million NGN) for today the property value would be 681, 592 GBP (212.6million NGN). This may look very extremely enticing to international investors who seek investment for security and passing wealth onto the next generation, however the UK government has increasingly targeted such investors by increasing their exposure to tax. Perhaps the final nail in the coffin is the proposal that from
April 2017, all residential property whether owned personally or through trust and company structures will be liable to inheritance tax on death, subject to reliefs such as the spouse exemption. The rate of inheritance tax is 40% on the value which exceeds the nil rate band of £325,000 (or £650,000 for a married couple or civil partners).
In essence, this change takes away the ability of non-UK domiciled individuals to shield UK residential property from inheritance tax by holding them through non-UK companies. Historically, non-UK domiciled individuals have often held UK residential property through non-UK companies, such as BVIs, for this reason. The UK government began to actively discourage this in April 2013 when they introduced a 15% SDLT charge (stamp duty) and the Annual Tax on Enveloped Dwellings (ATED), an annual tax applying to some residential property when it is held through companies. Then, with effect from April
2015, non-residents became liable to capital gains tax on the sale of UK residential property for the first time.
The Government will be consulting on the inheritance tax changes during the autumn and the new rules will come into effect from April 2017. However tax advisers are recommending anyone who owns property which might be affected to carry out a preliminary review of the structure now, as it may be advantageous to restructure sooner rather than later and there may be unpleasant tax costs if action is delayed.
Owners of UK residential property will need to get used to a potential inheritance tax exposure when it passes to the next generation.
An example of Mr Otoko:
He bought his property in the name of him and his wife in 1995 for £500,000. Last year Mr Otoko passed away and this year Mrs Otoko passed away with the home in London valued at £2, 270,000. Their children Kimi and Chuma would face an inheritance tax bill of at least £648,000.
In future investors in UK residential property will need to consider other means of protecting themselves from this potential inheritance tax exposure, such as a well-drafted will, financing the purchase with debt, making gifts or taking out life insurance.
They may also consider whether UK real estate is the most worthwhile investment afterall.
Please note that this area of UK tax law is extremely complex and the proposals are subject to change. No action should be taken in reliance of the information contained in this note and specific advice should be sought from tax advisers.
Source: Business Day