The private bank looks at the tax changes affecting the property holdings of non-domiciled residents in the UK.

A headache for non-domiciled persons living in the UK is that they may have to change their property holding structures as new non-dom rules kick in from the start of April. To help cut through the thicket of rules, Coutts, the UK private bank, has provided this commentary from John Saunders, managing director, Western Europe and Americas, at the bank. The editors here are grateful for these insights and invite readers to respond. Email tom.burroughes@wealthbriefing.com.

Many non-UK domiciled individuals are currently faced with the dilemma as to whether to remove their UK residential properties from existing non-UK holding structures. 
Individuals from outside the UK have commonly used non-UK entities to hold their UK property investments. The primary reason is that the estate of a UK non-domiciled individual is subject to UK inheritance tax on UK assets but not on assets located outside the UK. Holding a UK property through a non-UK company currently converts the UK property asset into a non-UK asset (the shares of the non-UK company) which is outside a charge to IHT.

The UK government has been keen to discourage non-UK property investors from using this type of planning and measures have been introduced in recent years directed at non-UK entities such as offshore companies which hold UK residential property. These measures include a 15 per cent Stamp Duty Land Tax (SDLT) charge on corporate purchasers of residential property, the “Annual Tax on Enveloped Dwellings” or “ATED” and ATED CGT charges.

During the 2015 summer budget the government announced that all UK residential property would be within the scope of IHT regardless of the ownership structure and irrespective of whether the property is for personal use or is an investment property. Whilst some individuals had decided to pay the ATED charges in return for protection from IHT most are now looking again at their holding structures and are considering their options.

Whilst Coutts does not provide tax advice, we have been working closely with our clients and their advisors in past months to assist them in making the right choice. The review process involves working with clients and their advisors to identify the most appropriate future holding arrangement for the client based on client needs and circumstances. Before a decision can be made it will be necessary to consider the cost of moving from the current to the future holding arrangement.

UK homes
Many clients with UK homes have decided to place them in sole or joint personal names. IHT can be managed by using the IHT surviving spouse exemption (where available) and potentially joint holding with children where appropriate and where the children will share the use of the property.

Mortgages are an important planning tool and should be seriously considered for new purchases. As well as assisting with financing, where mortgage proceeds are used to acquire or improve a property the amount of mortgage outstanding at the date of death of the owner is likely to be deductible for IHT. A combination of joint ownership and a mortgage may be an effective way of managing IHT and dealing with the succession of the property.

For some people, borrowing brings unease and negative connotations, but debt actually provides our clients with many opportunities. Indeed, we are currently witnessing growth in lending demand by HNW and UHNW clients, who are borrowing more, but wisely. Despite Brexit, mortgage volumes are healthy as clients look to fix for longer tenures with rates at historically low levels. Credit lines and liquidity are also cheap and as a private bank we can deliver tailored and complex lending solutions, including to international and entrepreneurial clients who have more idiosyncratic financial profiles that cannot be served by high street banks. Clients are thinking more holistically about lending across their personal balance sheet, using debt to optimise their portfolio returns. With a low loan-to-deposit ratio and strong balance sheet, we have headroom to grow and it’s fair to say that Coutts is very much open for lending business.
 

Buy-to-let investments
While ownership through a company will no longer provide protection from IHT, there continue to be income tax benefits of corporate ownership where the property is a buy-to-let investment. As the ATED charges are not payable this remains a viable option particularly if the shares of the company are held in joint names.

Trusts
From 6 April where UK residential property is held in trust, either directly or though a holding company, it will be “relevant property” for IHT. This means that there is likely to be an IHT charge payable by the trustees on the value of the property every 10 years and an exit charge should the property leave the trust at any time. Importantly if the settlor is able to benefit from the use of the property the Gifts with Reservation of Benefit rules may result in an IHT charge on the settlor’s death. This may be avoided if the settlor is prepared to pay a commercial rent for the use of the property.

Whilst trusts remain an excellent tool for achieving multigenerational family succession and protection of assets, careful planning will be required where UK homes are to be held in trust in the future.

De-enveloping
Before a decision can be made as to how UK property will be held it is necessary to consider the cost of de-enveloping.

The most significant cost in removing a property from the ownership of a corporate is likely to be SDLT, which is payable on the actual or deemed consideration for a property transaction (e.g. assumed debt liabilities such as where a company mortgage is taken on by the beneficial owner on liquidation). There may also be a further 3 per cent where the UK property is a second home for the transferee or a buy-to-let investment.

ATED CGT may also be payable on any gain in value of the property from the date the company became subject to ATED to the date of disposal, at a rate of 28 per cent.

Next steps
There is now little time to complete property restructuring before 6 April. Even once a decision has been taken as to how to hold the properties, the steps to be taken can be complex and will take time.

Where it has not been possible to de-envelope before 6 April, a further year's ATED will be payable in April. However it is possible to request a part refund of ATED once the property has been removed from the company’s ownership.

Where the property or shares in the property company are to be gifted and/or held in joint names it may be necessary for the gift to be completed before 6 April. This is because from 6 April a gift of the shares of UK property holding company will be a lifetime gift of “relevant property” which could result in an IHT charge should the transferor die within seven years of making the gift.

Where the shares of a property holding company are held in trust it may be important to take some initial steps before 6 April. If the shares of the property company are removed from the trust after 6 April this might trigger an IHT exit charge which would not be payable if the shares are removed before the rules change.

Property owners should also consider their succession planning needs. The succession law of England and Wales will apply to real estate held in individual names and a UK will should be considered. Where a property will continue to be held in the name of a company, the succession of the shares of the company should be considered in the context of the beneficial owners’ overall succession planning arrangements.

There are many traps for the unwary and it is important that quality professional advice is taken before any decisions are made. If a decision is taken to de-envelope the property the advisor should be asked to provide a step-by-step guide for the company administrators to take to ensure that everything is done correctly and in the right order.