Historically, by holding UK residential property in an off-shore company, a non-domiciled/non-deemed domiciled individual ensured that the property was not included in his estate for inheritance tax purposes. Non-UK domiciled individuals previously only paid inheritance tax on UK real property. By holding the UK residential property via an offshore company, the assets the individual held are shares in an offshore company – i.e. not a UK situated asset. Company shares were often placed into trust, especially if there was a future danger of the individual (re)gaining UK domicile or deemed domicile.
This was standard tax planning for a non-domiciled individual. The treasury were fully aware of it and allowed it to continue for many years… until now. It was one of the reasons why the UK was so attractive to wealthy international investors (together with historically favourable CGT treatment among others).
Schedule 10, Finance (No. 2) Act 2017 ended the IHT protection gained by non-domiciled inviduals holding UK residential property via offshore companies in 6 April 2017. To the extent that the value of shares in such companies is attributable to UK residential property, the shares are not excluded property and they will form part of the estate for UK IHT purposes. From an IHT point of view, there is now no practical difference between holding a UK property directly or holding via an offshore company.
When recent changes to Capital Gains Tax and Stamp Duty are factored in, together with ATED, use of offshore companies for this purpose are pretty much over and done with.
Article by Vassos Vassou