UK Government announces extension of IHT to more non-dom UK property owners

Author: Helena Luckhurst

The first Conservative Government Budget for 19 years will fundamentally change how non-UK domiciliaries (non-doms) are taxed to UK taxes. In this article, we focus on one aspect of the announced changes – the Government’s plan to make more non-doms pay Inheritance Tax on their UK residential property from April 2017, even if it is held in an offshore structure.

Let’s start with the basics: what is a non-dom?

English law recognises the concept of domicile. There is no statutory definition of domicile, but over the years English case law has defined it to mean, in essence, the jurisdiction in which you have your permanent home. If you weren’t born in the UK and don’t have your permanent home in the UK, you are probably a non-dom for UK tax purposes. If you are unsure about your domicile status, now is the time to take advice about it.

What is UK Inheritance Tax (IHT)?

Most people only come across IHT when a person dies. It is primarily a tax on the value of a deceased person’s personally held assets on death. However, it can apply on the death of a beneficiary of certain types of trust too, at which point the trustees have an IHT liability.

All individuals have a £325,000 nil rate band, although that band can be reduced, by gifts made within seven years of death among other things. By way of example, if an individual’s estate for IHT purposes is worth £1,000,000, in practice the first £325,000 bears no IHT. However, the remaining £675,000 is taxed at 40%, resulting in an IHT bill of £270,000.

Currently non-doms only pay IHT if (broadly speaking) they own UK situated assets in their personal capacity on death. But this is set to change based on the Government’s proposals.

Do you own UK residential property through a structure?

Non-doms wanting to invest in the UK property market without exposing themselves to IHT often invested through a non-UK company. The non-dom might own 100% of the company’s shares on death but as those shares were not UK assets, no IHT was payable on them (or the underlying UK property) on the non-dom’s death. The company shares were ‘excluded property’ for IHT purposes, meaning that the shares were ignored for IHT purposes on the non-dom’s death.

Non-doms who were also long-term residents of the UK often placed the shares of the non-UK company into a non-UK trust (an Excluded Property Trust) before they became deemed domiciled in the UK for IHT purposes – i.e. before they had been resident in the UK for 17 out of the last 20 UK tax years.

In recent years, particularly with the introduction of the Annual Tax on Enveloped Dwellings (ATED), ownership of UK property by a non-UK trust (with no intervening company) has been considered as an alternative. This avoids ATED but forfeits the IHT advantages.

Whichever of these scenarios has been used, the Government wants to look through them to the ultimate non-dom owner.

What is proposed?

The Government plans to amend the rules on what constitutes excluded property for IHT purposes, so that ‘trusts or individuals owning UK residential property through an offshore company, partnership or other opaque vehicle, will pay IHT on the value of such UK property in the same way as UK domiciled individuals’.

Note that the proposals apply to UK residential property only but will include let residential property (regardless of the terms on which it is let) as well as UK residential property used as a home. However, in keeping with the scope of the new non-resident Capital Gains Tax, the Government intends that diversely held companies and certain types of communal residential property will not be affected.

UK residential property of any value will be affected. Unlike ATED, there will be no minimum threshold.

Existing structures will be affected, not just new structures set up after the changes come into force.

When will the IHT charge ‘bite’?

The Government is targeting the following events:

For ownership of UK residential property by a company:

  • The death of the individual who owns the company shares.
  • The death of the individual within seven years of having given the company shares to another individual.

For ownership of UK residential property through a trust/underlying company structure:

  • A gift of the shares of the company (owning the UK residential property) into trust.
  • The death of the individual who created or added value to the trust, where he benefits from the company shares or the UK property when they are in the trust (i.e. the IHT reservation of benefit rules will apply).
  • On ten year anniversaries of the creation of the trust.
  • On distribution of the shares of the company out of the trust.

The Government recognises that these companies may hold assets other than UK residential property, or that the trust might not own all the shares of the company owning UK residential property and that, therefore, some system of value apportionment will have to operate.

What should I be doing now?

We do not have any details on precisely how the changes will be implemented. The Government intends the changes to come into effect from April 2017 and legislation will be included in the Finance Bill 2017. That means that we are unlikely to see draft legislation until December 2016 at the earliest.

The reason for the long lead-in is that the Government wants to consult on the details of the changes. It intends to issue a consultation document this autumn to seek views on how best to deliver the changes. That document should provide the first insight into exactly how these changes will dovetail with existing legislation, at which point it should be possible to start drawing up a planning strategy which fits your particular circumstances.

The Government has admitted that it understands that this change may encourage non-doms to ‘de-envelope’ (move UK residential property out of company and trust ownership into direct ownership) and that there will be associated costs in doing so. This change is another example of the Government’s apparent keenness to encourage de-enveloping in the last few years, although it has been sending out mixed signals. It promises to have regard to the cost implications of de-enveloping, which hints that there may be concessionary features in the new legislation to help reduce the tax ‘costs’ currently associated with de-enveloping.

Familiarity with IHT mitigation strategies, previously the preserve of planning for UK domiciliaries only, will now become a central feature in any non-dom’s UK estate planning strategy where UK residential property is part of the portfolio of UK assets.

Our advice is to take this opportunity before the consultation is published to identify whether you have structures holding UK residential property. Seek advice about the merits of the structure – why was it created in the first place? Will it still bring benefits to your family if these changes happen? Many structures have non-tax benefits which may still be of immense value to your family, notwithstanding the proposed changes.

Helena Luckhurst, Partner, Fladgate LLP (

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