With regards to UK inheritance tax (“IHT”), a UK domiciled individual pays inheritance tax on his/her worldwide assets less liabilities. A non-UK domiciled individual only pays UK IHT on his/her UK assets.
Up until April 2017, if an individual held UK residential property, they were able to avoid IHT by holding the property via an offshore entity, such that it became a non-UK asset.
However, the new rules extend the scope of IHT to interests in foreign entities which hold UK residential property, either directly or indirectly. Such interests, to the extent that their value is attributable to UK residential property, are no longer excluded property, and are subject to IHT. Please note that the rules are unchanged with regards to UK commercial property, which remains outside the scope of UK IHT if held by a non-domiciled individual via an offshore entity.
An interest in a non-UK entity will only be within the scope of IHT where it is an interest in a close company or partnership (or equivalent entity).
An interest will be disregarded if the interest is less than 5% of the total interests in the close company or partnership. For the purposes of considering whether the 5% threshold is met, the interests of connected persons will be taken into account. Connected persons include spouses, ancestors, descendants, brothers, sisters, trusts set up by such relatives and companies owned by relatives or such trusts.
A debt interest in a close company may also be an interest in a close company and therefore may be within the scope of IHT itself.
Where an interest in an entity holding UK residential property has been sold or a relevant loan repaid, the proceeds of sale or loan repayment will be within the scope of IHT for 2 years following the disposal.
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