UK Inheritance Tax and Estate Planning Considerations for Foreign Buyers of Residential Property – Commentary
Exposure to inheritance tax in the UK
Take out mortgages
Life insurance
Wills
When acquiring property in the UK, in addition to seeking legal assistance on the transfer of property, buyers should seek advice on the broader tax and legal implications. As with any substantial acquisition or investment, there will always be potential pitfalls. Taking advice up front will allow proactive planning and help avoid costly future challenges.(1)
Exposure to inheritance tax in the UK
The acquisition of UK real estate by a non-UK domicile will always come with increased exposure to UK Inheritance Tax (IHT). The value of UK property in a person’s estate will be subject to IHT at a flat rate of 40% on death if and to the extent that it exceeds the amount of the available zero rate bracket of the deceased up to ‘at £ 325,000.
In the past, non-UK natural persons (who are only exposed to IHT on UK assets) would have been advised to acquire UK real estate through a company non-UK registered holding company, which would act as a âsituation blockerâ and protect the value of IHT’s property. However, following the introduction of the anti-avoidance legislation in April 2017, shares of a company not registered in the UK will effectively be treated as UK assets for IHT purposes (and therefore will be exposed to the IHT, regardless of the domicile of the deceased owner) if and to the extent that their value reflects the value of the underlying UK residential property.
Borrowing from individuals (e.g. friends or family) or non-UK resident trusts offers less IHT protection when viewed in aggregate, as although debt must be deductible from the estate of the borrower for the purposes of the IHT (subject to various legislative conditions being met), the benefit of the debt will be submitted to the IHT in the hands of the lender. This was another of the changes introduced in April 2017.
In particular, to obtain probate of a foreign will in the UK, the Estates Register will require a foreign law affidavit confirming the validity of the will under local law and who is empowered to administer the estate. This creates an additional administrative hurdle (and associated costs) for executors that would not arise if there was a local will in place.
For more information on this topic, please contact Emma Gilly to Forsters LLP by phone (+44 20 7863 8333) or email ([email protected]). The Forsters LLP website can be accessed at www.forsters.co.uk.
End Notes
(1) This article is one of a series of tips for UK homeowners. For the first article in the series, please see “Asset Protection Considerations for UK Homeowners “.