UK property has remained popular with investors from all over the world, particularly the UAE. London is considered a safe haven and an attractive destination for investors perhaps more than any other major city in the world, some would argue. With its solid track record, clear legal title and lots to do, it remains a favourite destination for property investment, particularly for GCC families.
When buying in the UK, depending on the level of investment, well-advised foreign investors would use structures to reduce their exposure to taxes. Typically, property would be purchased using various structures such as trusts, special purpose vehicles or similar offshore corporate structures. For many years, this was the standard method to buy UK property to alleviate exposure to capital gains and inheritance/death taxes.
However, recent tax changes mean this is no longer the case.
Back-dated legislation to April 6, 2017, means that non-domiciles and non-residents owning UK property indirectly through corporate structures, purchased either before or after this date, are liable for UK death tax at 40 per cent.
This tax is based on the value of the property at the time of death and must be paid before the asset can be passed on to the family, heirs or estate. Moreover, this tax bill must be paid within six months, otherwise Her Majesty’s Revenue and Customs reserves the right to fire sell the asset to recoup the unpaid tax.
To make matters worse, the asset cannot be sold by the family to meet the death tax bill. This must be paid in cash to HMRC before the family has access to the asset.
The government sought to increase the taxes on UK property held through structures by introducing a raft of anti-avoidance measures aimed at property that is held indirectly.
Consequently, all recent structures typically used by GCC investors are now no longer effective in protecting residential property from the 40 per cent death tax. So, what can you do to protect your UK property assets? The options are pretty slim but in basic terms, they are as follows:
- Sell the property: This is not always attractive since many are legacy and intended to be passed down the family. Similarly, UK property prices are soft at present and the best price may not be achieved. Also, the seller must survive for another two years after selling to stay outside of this tax.
- Gift the property: Disconnect your legal right to the asset and then ensure you survive seven years to avoid any tax on your part. This is not always popular for GCC families since the patriarch prefers to retain control right until their demise. Also, the person receiving the gift is now liable for the death tax bill on their demise.
- Liquidity solution: In simple terms, an insurance policy that will pay the death tax bill when it will happen. Insurance policies create cash when you need it the most, so this is a cost-effective solution to protect the asset for future generations, retain control and avoid paying this tax to HMRC from other assets.
Few property investors are aware of this revised legislation, the impact on their residential property portfolio and how to plan for it. Whether the property has a mortgage, or you intend to gift the property to other members of your family, there remains a hefty 40 per cent bill if you don’t plan for it.
The asset cannot be sold by the family to meet the death tax bill. This must be paid in cash to HMRC before the family has access to the asset
Moreover, wealthy families have complex affairs and in the event of their demise, access to capital is difficult while probate in multiple jurisdictions takes place. Couple that with an additional layer of complexity with Sharia and obtaining cash when you need it the most could be delayed, resulting in HMRC taking matters into its own hands.
Working collaboratively with lawyers, family offices, fiduciary agents and/or financial advisers to reach a solution that creates money to meet the death tax liability when triggered is essential. This ensures the property assets are passed swiftly to the family/estate as intended and does not result in HMRC fire selling it to recoup the tax. The solution is relatively straightforward, low-cost and more than mitigates the potential cost of the death tax bill.
UK property, in particular London, is likely to continue to be an attractive destination for investors. Recent statistics show there is more than £35 billion ($49bn) worth of London property held through British Virgin Islands structures alone.
Tax bills can always be mitigated but there is no getting around it anymore for foreign buyers of UK property. So, it means careful planning beforehand with your professional partners to ensure your UK property assets are passed on as intended.
Tim Searle is the chief executive of Globaleye
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