Briefing note


  • No exemption for buy to let
  • Non-close companies excluded
  • Related party debts included as is collateral supporting third party debt
  • Likelihood of HMRC collecting 40% IHT is remote amongst the well advised
  • Dry trusts unaffected (ten year charge applies)
  • Life insurance is still a viable option
  • Other – reliefs remain available to shelter IHT

Inheritance tax (IHT) and “enveloped” residential property

The draft Finance Bill 2017 contains proposals on how HMRC plan to levy IHT on residential property held in non UK structures, for example a non UK resident company, partnership or trust for the benefit of non UK domiciled individuals (non doms).

A glossary of terms is at the end of this note.

The first point to note is that unlike ATED, and ATED related CGT and SDLT, there is NO exemption for commercially let properties.

Non-close companies, such as residential property funds, are excluded from these provisions.

The second point to note is that these changes apply to RNDs who are not currently deemed domiciled (including those who will become deemed UK domiciled post April 2017), and non-UK resident and domiciled individuals.

This note covers three areas: the current regime, including the effect of the changes to excluded property; related party debts which would otherwise be excluded property; and solutions.

Current position

Non doms benefit from the “excluded property” rules, which take certain property outside the scope of UK IHT.

Excluded property includes property held by a non-UK domiciled individual located outside the UK, such as shares in an overseas company, and non UK property held by a non UK resident trust which was settled at a time when the individual was not UK domiciled.

Finance Bill 2017 changes this position where the overseas entity derives its value (as to more than 1%) from UK residential property.

From 6 April 2017, the overseas entity will no longer be excluded property.

Accordingly, if the entity is held by an individual, then IHT at 40% will arise on his death.

If the entity is owned by a trust, then ten-yearly charges will apply.

The two most common ownership structures are:
  • a “dry” non-UK resident trust; and
  • a non UK resident company which is itself owned by a non UK resident trust.

Notwithstanding the recent introduction of ATED, ATED related CGT and ATED related SDLT, overseas companies continue to be commonly used to hold UK residential property.

The table below summarises the effect of the changes.

RND 2017
In scope of IHT
IHT if RND owns shares; if not, ten-year charge
IHT if
NonR owns shares; if not, ten-year charge
In scope of IHT
IHT if RND owns shares; if not, ten-year charge
IHT if
NonR owns shares; if not, ten-year charge
Ten-yearly charge
Ten-yearly charge Ten-yearly charge Ten-yearly charge Ten-yearly charge
Directly held In scope of IHT In scope of IHT In scope of IHT In scope of IHT  In scope of IHT


Given the fairly recent introduction of the anti-avoidance provisions around the use of debt to reduce the value of the UK estate, it is surprising that related party debt or collateral used to purchase a residential property in conjunction with an entity is no longer excluded property.

We have previously advised that related party debt which complies with the changes made in 2012 was a viable method of protecting against IHT (which indeed it was), but from 6 April 2017 some other exemption, or third party non-cash collateralised debt will only be effective.


If you currently occupy a property under a dry trust arrangement, our long time preferred solution, then apart from reviewing any life insurance cover, there is nothing for you to do.

If, however, you are in a corporate structure, then you should review your affairs to see if the company can qualify for BPR, or use other IHT exemptions such as those available to personal pensions, such as SIPPS, QROPS and QNUPS and insurance products.


There are also anti avoidance rules for sales and a targeted anti-avoidance rule.

Glossary and small print

This note assumes that the reader has a knowledge of UK taxation of HNWIs and RNDs, and is either a client of this firm or an adviser to such a client, and is of course no substitute for advice based on your personal facts and circumstances.

No liability is accepted for reliance by any person upon any statement made in this paper.

Section 61(2) Law of Property Act 1925 applies to this paper.

This paper is not investment advice, all decisions must be made by you or your financial advisers.

This paper is for information only.

ATED –annual tax on enveloped dwellings; CGT –capital gains tax; entity –any entity other than an individual; dry trust –a trust which has no income or gains and holds only the residential property; HMRC – HM Revenue & Customs; IHT –inheritance tax; Non-dom –an individual who is not domiciled or deemed domiciled in the UK or any part of it; NonR – non UK resident individual; RND –an individual who is UK tax resident but not domiciled or deemed domiciled in the UK (both pre and post April 2017); QNUPS – qualifying non UK pensions scheme; QROPS–qualifying recognised overseas pension scheme; SIPP – Self-invested personal pension; ten-year charge – the charge to IHT on the net value of assets held in a trust, currently 6% charged on every ten year anniversary of the trust; reference to UK / non UK is to the situs or residence as the context requires.

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