What are the changes?

The Government is consulting on changes which will mean that non-domiciles can no longer escape a UK IHT charge on UK residential property by owning it through an offshore vehicle such as a company or trust.  The period for consultation runs until 20 October 2016 and the changes will come into effect from 6 April 2017.

Shares in offshore close companies, (broadly those with five or fewer participators), and similar entities will no longer be excluded property and will now be subject to IHT if, and to the extent that, the value of any interest in the entity is derived, directly or indirectly, from residential property in the UK.

Also, where a non-domiciled individual is a member of an overseas partnership which holds a residential property in the UK, such properties will no longer be treated as excluded property for IHT.

There is no change to the taxation of UK property held by companies or other structures which are owned by UK domiciled individuals or by trusts made by UK domiciled individuals.

When will the changes be effective?

The changes will be effective for all chargeable events taking place after 5 April 2017.  For these purposes, the definition of a chargeable event will follow the existing IHT rules.

Properties affected

The legislation will need to define the types of property which will become liable to IHT.  The consultation paper discusses alternatives which would include:

  • any building which is used or suitable for use as a dwelling;
  • any building which is in the process of being constructed or adapted for use as a dwelling; and
  • the grounds in which such a building is situated.

It would exclude:

  • a care or nursing home;
  • any building with 15 bedrooms or more which has been purpose-built as student accommodation and occupied by students; and
  • prisons and military accommodation.

There will be no minimum value threshold, and dwellings used as a main residence are not excluded.

A property will be within the charge to IHT where it has been a dwelling at any time within the two years preceding a chargeable event.  However, there will be an apportionment where a property has been used for residential and for other purposes at the same time e.g. a flat above a shop.

Property value

It will be necessary to establish the value of the property for IHT, as tax will be charged on the open market value of the property at the time of the relevant chargeable event (e.g. the death of an individual, redistribution of share capital, or a gift of shares in a close company).


In line with the current IHT rules, the new charge on residential property will apply only on the market value of the UK residential property and will take account of any relevant debts.

For this purpose, relevant debts are those which relate exclusively to the property such as amounts outstanding on a mortgage which was taken out to purchase the property.  Any debts which are not related to the property will not be taken into account when determining the value chargeable to IHT.

The government intends to disregard any loans made between connected parties when determining the value of the property.

Tax avoidance

The government proposes to include targeted anti-avoidance rule in the new legislation, the effect of which will be to disregard any arrangements where their whole or main purpose is to avoid or mitigate a charge to IHT on UK residential property.  Accordingly, any borrowing against a property would need to be considered carefully in the context of these rules.

Who is liable to account for the IHT?

If a property is owned through an overseas company, it could be difficult for HMRC to identify whether a chargeable event has taken place, and therefore whether a liability to IHT has arisen.  To deal with this, the government is going to extend responsibility for reporting to HMRC.

The government may introduce a measure so that the property cannot be sold until any outstanding IHT charges are paid.  In addition, they propose to introduce a new liability on any person who has legal ownership of the property, including any directors of the company which hold the property.

Consequences of the changes

Non-domiciled clients may wish to explore de-enveloping their properties i.e. taking them out of their corporate wrappers, if they have not done so already.  This will have tax and other consequences which will need to be weighed up against the consequences of retaining the property in a corporate wrapper.

The Annual Tax on Enveloped Dwellings (ATED) should also be considered as part of any decision to de-envelope.  The amount of the ATED charge depends on the annual chargeable amount, and is dependent on which of the (currently) five bands (based on value) the dwelling falls within, and the number of days in the chargeable period that the chargeable person is within the charge.  Property is often de-enveloped to avoid future charges to ATED and ATED related CGT.

Disappointingly, the government has said that it is not going to provide any incentive to encourage individuals to exit from their enveloped structures, despite recognising that there might be a case for encouraging de-enveloping.  This may mean that a client is better off retaining their property within a corporate structure . Clients may also want to explore options for borrowing against their properties, subject to a consideration of any anti-avoidance rules, however it is likely borrowing will only be effective for IHT mitigation purposes if a property is mortgaged at the time of purchase on usual commercial terms The advantage of this being any cash retained personally abroad is not subject to IHT if the client is non-domiciled and the UK property is devalued by commercial borrowing.

This brief is written on the basis of tax law, practice and interpretation thereof as at the date of this document.  This brief is for general guidance only and is not meant to provide legal advice.  Specific advice should always be sought in relation to the facts of a particular situation.

Article written by Sarah Cardew & Elizabeth Jones