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GUEST ARTICLE: Coutts On "De-Enveloping" Property For Non-Doms As New Regime Bites

John Saunders, 23 March 2017

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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.
 

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