The Finance (No 2) Bill 2017 is currently passing through Parliament and is expected to receive Royal Assent in December with application from 6th April 2017.

That is not, for once, a typo; HMRC have discovered time travel.

These provisions were first published in December 2016 with the expectation that they would become law with effect from 6th April 2017 when the Finance Bill 2017 was meant to become the Finance Act 2017.

However, large swathes of the original Bill were cut following the shortened parliamentary timetable necessitated by the general election.

Many people, including some advisers, thought the residential property provisions would be gone for good, or at the very least, delayed.

Given the strength of HMRC’s views that there should be a level playing field between UK and non-UK domiciled individuals owing UK residential property, the only real question was whether the changes would be deferred until 6th April 2018.

Clearly not.

From 6 April 2017, there is no practical difference from an IHT perspective between holding UK residential property directly or through a company.

The changes work by removing from the definition of excluded property any value attributable to UK residential property, whether that is directly held, or through a non-UK company/partnership.

This blog piece focuses on property held through a company, as that is the more common structure.

A charge under the new rules will occur on any of the normal IHT chargeable events, such as death, a lifetime transfer to a trust etc.

As it is the shares in the offshore company which are removed from the definition of excluded property, the value to be charged to IHT is that of the shares to the extent it relates to UK residential property, and not the value of the underlying property itself.

The position will be more complex where the company also holds foreign assets (which will continue to be excluded property), or there is debt.

In the case of foreign assets, an apportionment is required on a “just and reasonable basis” of the value to be attributed to the company’s shares.

Any valuation will also need to take into account other relevant factors, such as inherent liabilities (CGT, ATED) and discounts for minority interests.

Debts of the offshore company are apportioned across all assets, even if a loan is secured on just the UK property

There is now also IHT on the value of loans made to finance the acquisition, maintenance or enhancement of UK residential property, and security arrangements.

Further, there is a two year time lag before the proceeds of a sale of (for example) a close company owning UK residential property, or the repayment of a debt, will be considered excluded property even if invested offshore.

Commercial lettings/buy-to-let

Unlike the ATED rules, there is no escape from an IHT charge if the residential property is let on a commercial basis to third parties, or is used to provide employee accommodation.

The majority of corporate structures will be caught unless the company is diversely held such that it is not a “close” company or the interest falls within a 5% de minimis limit.

You are an Executor in China…

There are practical issues.

If a non-domiciled individual ultimately owns foreign company shares deriving their value from UK residential property, an IHT charge arises on his death.

But when an individual dies in a foreign country, it is unlikely that payment of UK IHT will be at the forefront of the personal representatives’ minds.

The usual method of enforcement of IHT is that one cannot obtain a grant of probate or letters of administration without first paying the IHT for the estate.

However, the property can be sold by the entity owning it without restriction, so unless there is some intricate tie up with the PSC register, international death records and the Land Registry, then how likely is it that HMRC will ever know?

HMRC’s response is that a charge will be imposed on the UK residential property in their favour, however, that doesn’t entirely solve the information gap issue.

Offshore trusts

For trustees with offshore property companies, the changes are an unwelcome introduction to the IHT relevant property regime, particularly if the trust was settled in a year ending in 7 or 8.

On the next tenth anniversary of the establishment of the trust, the trustees will be liable to a periodic charge in respect of their relevant property.

Broadly, the rate of IHT is 6% (30% of the lifetime rate) multiplied by the value of the “no longer excluded property”, net of any allowable deduction for debt, multiplied by the number of quarters since 6 April 2017 divided by 40.

HMRC are of the view that s 65(4) does not apply, so that the first quarter of the relevant property period is not excluded and the periodic charge clock started on 6 April 2017.

IHT arising under the new rules should be eligible for the instalment option (s 227) even if the property is owned by a company (note though that the overseas company will need to have share capital).

There are no plans to add loans to the list of property eligible for payment by instalments 7, so IHT will be due within six months of the 10- year anniversary date.

Whilst it seems harsh that related party loans are treated less favourably than the residential property itself for the purposes of IHT, this is in line with the position of UK domiciled individuals and trusts which were settled by a UK domiciled person, who are similarly not entitled to the instalment option on related party debt.

Already I have heard advisers say, pay the tax, but there are a number of cost effective ways to mitigate this charge, depending on circumstances, which probably fulfils some overdue tasks that need to be looked in to in any event.

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