• Middle East investors in the UK property market may be hit by a change in legislation. 
• The change, which comes into effect on 6 April this year, could see investors’ families/beneficiaries lose out on 40% of their property value. 

Dubai, UAE, March 2, 2017:  New UK legislation coming into effect from 6 April 2017 could impact thousands of people living in the Middle East. The change will affect non-UK domiciles who have invested in the UK property market through an offshore corporate structure – such investors may need to take action.
For people in the region, the UK Property market has been a popular investment choice, especially London where growth continues to be strong. The average house price has risen over 65% in London in the last 5 years*. A common way for people living in the Middle East to invest in the UK property market is through an overseas corporate structure or trust. This process is often referred to as ‘enveloping’.

Currently, non-UK domiciles who hold UK property through an overseas corporate structure will benefit from the investment being exempt from UK inheritance tax (IHT) on death. With UK IHT at a rate of 40%, these corporate structures have grown in popularity as investors look to take advantage of the favourable UK property market in a tax efficient way.

The new legislation will mean the UK tax authority (HMRC) will essentially be able to ‘see through’ these overseas corporate structures, making them ineffective from an IHT planning perspective. As a result, anyone holding UK property through such a structure will have their estate be liable to UK IHT on the asset upon their death, and should seek professional advice on how best to meet this liability. Wealthy individuals are often asset rich but cash poor, so taking steps to ensure liquidity upon death, such as setting up a life assurance policy in trust, could help beneficiaries meet the tax liability.

People holding these overseas corporate structures should also seek professional advice to review their next course of action, as without the tax advantages, these structures require careful consideration.

The new legislation essentially brings the IHT rules between UK domiciles (UK expats) and non-UK domiciles investing in UK property into line. UK expats have never been able to invest in these offshore structures to avoid UK IHT, and have always been liable to UK IHT on their UK and worldwide assets on death.

Estate planning is an important consideration for UK expats, who look to mitigate their IHT exposure and help ensure beneficiaries have liquidity to meet any tax bills on death. This same level of estate planning is now necessary for non-UK domiciles investing in the UK property market through an offshore structure, as many may now need to plan for a future IHT liability for the first time.

David Denton, International technical sales manager, Old Mutual Wealth, comments: 
“There appears to be little awareness among investors for this imminent change in legislation, and could result in beneficiaries being hit with an unexpected tax bill. UK IHT is charged at 40%, so it is important that investors take professional advice to ensure adequate provisions are in place and funds are available to their beneficiaries to pay any future IHT liability.”

*Source: Office of National Statistics, house price index, December 2016. Average house price Dec 2011: £292,000. Average house price Dec 2016: £484,000.