UK inheritance tax net spreads to UAE properties: Have you planned ahead?

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 of course lots to do, it remains a favourite place for foreign investors in this region.

Typically, investors purchase using structures such as Trusts, Special Purpose Vehicles (SPV), or similar offshore corporate structures, and for many years, this was the standard method to buy UK property in order to mitigate exposure to Capital Gain and Inheritance/Death taxes.

However, recent tax changes mean this is no longer the case and with events in Eastern Europe, more legislation is being rushed through parliament to uncover ultimate beneficial owners (UBO) of assets.

As a result, UK property attracts 40 percent Death Tax sometimes referred to as Inheritance/Estate Tax (IHT) regardless of structure. The tax is levied on the value at time of death and must be paid before the asset can be passed on to the family.

Moreover, this tax bill must be paid within 6 months otherwise the British Government (HMRC – Her Majesty’s Revenue and Customs) reserve the right to fire sell and/or confiscate the asset to recoup the unpaid tax.

To make matters worse, the asset cannot be sold post-death by the family to meet the IHT bill, this must be settled in cash before HMRC gives access to the asset.

Typically, wealthy families have complex affairs with assets in multiple jurisdictions, so until probate has been granted in all locations, there can be a liquidity strain on the family at a very difficult period which could result in losing the asset(s).

Further delay could be created if Shariah principles apply to the estate too but this will have no bearing on the strict timeline above.  

The planning options are pretty slim but in basic terms they are as follow:

Sell the Property – not always attractive since many property assets are legacy and intended to be passed down the family. Similarly, UK property prices remain buoyant so bailing on prime property assets is not tenable. Or …

Gift the Property – disconnecting your legal right to the asset and then surviving 7 years to avoid any tax on your demise. The person receiving the gift has full control over the property and now have their own IHT exposure to manage. Gifting is not always popular in this region due to the lack of control so the patriarch prefers to retain control until their demise. Or …

Liquidity Solution – in simple terms an insurance policy that pays the death tax bill when, not if, it will happen. Insurance policies sit outside of the probate process and essentially create quick cash when you need it most thereby a cost-effective solution to protect the asset for future generations, allowing the patriarch to retain control throughout and satisfying the HMRC deadline.  

Unfortunately, few foreign investors are aware of the revised legislation, the impact on their residential property portfolio and how to plan for it.

The UK Government, like others, is using aggressive tax legislation not only to recoup their tax coffers post-Covid but to uncover the property assets that may have been procured by nefarious means. Events in Europe are fast tracking new legislation and subsequent confiscations with more measures on the horizon.

For example, the UK Government intend to launch the ROE (Register of Offshore Entities) with the Land Registry soon. This will result in the UBO names, not their entities, becoming public record. Not all HNW will want their details in the public domain for a raft of reasons.

UK property, in particular London, as an attractive destination for foreign investors is now under question. With £35+ billion worth of London property held through BVI structures alone, there is plenty for HMRC to collect at 40 percent. For example, HMRC IHT takings increased 20 percent+ last year alone; foreign investors footing a good portion of that.

Investors should realise that the days of “getting around it” are over and don’t rely on legacy solutions since legislation change is constant.

Tim Searle, founder and chairman of Globaleye.