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Published On: 19 January 2021


At a glance

  • New register of overseas entities that own UK property comes into force in 2021
  • 97,000 properties in England and Wales are held by firms registered abroad and c.50% are located in London worth £33.9bn
  • Buyers face inheritance tax bill of £13.6bn on death
  • 57% of Prime Central London property acquired in 2020 was by overseas buyers
  • Prime Central London prices are at a 13 year low having peaked in 2014 and are now down c.16-20% in real terms

19 January 2021: A new register to identify foreign owners of UK property will come into effect in 2021 and will expose thousands of overseas investors and homeowners to the UK’s inheritance tax laws, according to London-based life insurance specialist adviser John Lamb Hill Oldridge (JLHO).

The UK Department for Business, Energy & Industrial Strategy register is designed to ensure that details of buyers, be they British expatriates or overseas nationals, are captured in order to mitigate potential money laundering and tax avoidance activities.

The UK residential property market is a magnet for international investors yet many are unaware that the minute they sign the completion papers, they will be required to pay 40% of the value of the property to HMRC (UK tax authority), at the date of death.

Although prime central London property prices are at a 13 year low, the average London property price has increased by 67% since 2010. A property bought for £10m in 2010 is now worth c.£16.7m which would incur a potential inheritance tax (IHT) liability of £6.7m on death. Although, HMRC can seize the property to satisfy the tax bill, they would much rather have the cash since it costs money to sell a property, the sale process takes time and the property market could drop in value in the interim.

Michelle Cartwright, Associate Director of John Lamb Hill Oldridge comments: “This new register represents a step change in the UK approach to overseas property owners. Without proper life cover in place individuals and their families will find themselves with a hefty inheritance tax bill to pay. With UK government finances reeling from the cost of its Covid support measures, the authorities are likely to be paying close scrutiny to those on and off the register as part of its financial rebalancing.”

UK assets directly owned are subject to inheritance tax of 40% on death regardless of the owner’s country of residence, nationality or domicile. Foreign investors used to typically hold their residential properties via offshore companies as an effective shelter against IHT. However, since April 2017 this option has no longer been viable as the rules changed for those residential properties owned by a non-UK company (which is not widely held, i.e. a ‘close’ company). As a result, the value of the company shares attributable to the UK residential property and associated relevant loans are now within the scope of IHT. Also when the shares of a property rich company are sold, there is an ongoing potential IHT liability for two years should the seller die within that period.

An easy solution for international property investors in the UK residential property market is to purchase life insurance which pays out a lump sum on death providing the estate with sufficient money to pay the inheritance tax. It also means the deceased’s children can keep the family’s property assets in the UK.

Some may be under the illusion that HMRC won’t find out about their death or even know they own property as it’s held via an offshore company. However, the new register goes live later this year and highlights there will be no room to hide.

Even if individuals choose to gift the property to their children, there is a potential 40% tax (with taper relief) on the gift should the donor die during the seven year period from date of the gift. A seven year run-off term insurance policy is an inexpensive and simple solution.

For British domiciled individuals living abroad (who have not acquired a domicile of choice), on death their worldwide estate is subject to UK inheritance taxes at a rate of 40%. According to JLHO, expatriates often find that it is difficult to find sterling cover in the local insurance market and rates can be more expensive. Moreover, these international products don’t have the benefit of the UK’s FSCS compensation scheme.

The good news is that certain UK insurers will provide insurance cover for British expats resident in many overseas markets. A specialist broker like JLHO can help individuals navigate the requirements and ensure that they obtain the appropriate amount of cover in sterling at an affordable price.

The IHT rules are complex and clients should seek legal and tax advice.

JLHO specialises in sourcing and managing complex life assurance placements as part of estate planning arrangements. The company’s core expertise lies in placing significant life assurance risks in mitigation of inheritance tax liabilities as part of a client’s longer-term succession planning. It is one of the largest UK practices in this specialist field.

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