Inheritance Tax and UK Property The scope and effect of the corporate look through in new Schedule A1 IHTA 1984 Philip Simpson, Q.C. Old Square Tax Chambers

Background Non-domiciled individual Immigrates to UK ‘Excluded property’ IHTA84, section 6(1) – will cease to apply IHTA84, section 48(3) – so property into trust before arrival? Foreign property vs. UK property Hold UK property via foreign company / partnership, whether directly or with trust in between

IHTA84, section 6(1) Section 6: Excluded property ‘6(1) Property situated outside the United Kingdom is excluded property if the person beneficially entitled to it is an individual domiciled outside the United Kingdom.’

IHTA84, section 48(3) Section 48: Excluded property ‘(3) Where property comprised in a settlement is situated outside the United Kingdom— (a) the property (but not a reversionary interest in the property) is excluded property unless the settlor was domiciled in the United Kingdom at the time the settlement was made, and (b) section 6(1) above applies to a reversionary interest in the property but does not otherwise apply in relation to the property.’

Key concepts ‘Domicile’ – either at common law or under special rules for IHT IHTA84, section 267 domiciled at common law in UK at any time in three years preceding relevant time > three periods of 12 months, not e.g. tax years formerly domiciled resident for tax year in which relevant time falls – residence as determined for income tax, and ‘for’ tax year excludes cases where split year treatment in non-resident part resident in UK for at least 15 of immediately preceding 20 tax years, and at least one of four immediately preceding tax years – so four (tax) years non- residence excludes this provision

‘Situated’ ‘Situated’ – main assets land / buildings – where located shares – where company incorporated, if registered; bearer shares, where certificate is located money – location of bank branch tangible moveable property – where physically present debts – where debtor resides

‘United Kingdom’ ‘United Kingdom’ Great Britain and Northern Ireland, but not Channel Islands / Isle of Man Interpretation Act 1978, Schedule 1

‘Beneficially entitled’ Ownership Includes reversionary interest in settled property > excluded but only if owner non-UK domiciled and it (as opposed to the property) is situated outside UK

New rules in Finance (No. 2) Act 2017 Inserting IHTA84, Schedule A1 Designed to catch value of non-UK assets to extent their value derives from UK land Mechanism – property is not excluded property by virtue of section 6(1) or section 48(3) if paragraph 2 or 3 of Schedule A1 applies to it

Key concepts ‘UK residential property interest’ – interest in UK land where land consists of dwelling, or to extent that it includes a dwelling (so discount for part of interest that is not a dwelling), or interest is under a contract for an off-plan purchase ‘Close company’ – defined as for corporation tax purposes, but so as to include non-UK resident companies ‘Partnership’ – partnership under Partnership Act 1890; limited partnership under Limited Partnerships Act 1907; LLP under Limited Liability Partnerships Act 2000; similar firm / entity under non-UK law

Definitions from TCGA92 Definitions incorporated from TCGA92 Schedule B1 ‘interest in land’ – broadly any interest in UK land, except security interests and licences to occupy ‘Dwelling’ – building used / suitable for use as dwelling, or in course of being constructed or adapted for such use – includes garden plus buildings / structures on garden Excludes schools, army barracks, etc. ‘Contract for off-plan purchase’ – contract for acquisition of land consisting / including (part of) building to be constructed / adapted for use as a dwelling – so caught from moment sign up to buy, rather than just from when acquire dwelling once constructed

First exclusion: close companies / partnerships Paragraph 2 applies to interest in close company (as defined for corporation tax purposes, but extended to include non-UK resident companies) or a partnership if value of interest is— directly attributable to UK residential property interest, or attributable to UK residential property interest only by virtue of interest in a close company or a partnership, or loans to which paragraph 3 applies So can either be direct > company actually owns UK residential property, or indirect, for example company is a partner in a partnership that owns UK residential property

Disregards Disregard interest in close company / partnership if value of interest is less than 5% of total value of all interests in close company / partnership – NB not concerned with value of UK property In working out whether meet 5% test, add value of any interests held by connected person ‘Interest’ in close company— not defined, but must have a value implies some sort of right of ownership probably all shares / options less clear if have only e.g. voting rights

Value attributable to UK land In determining what value is attributable to UK land, liabilities of close company / partnership to be attributed rateably to all of its property Therefore if borrow to fund purchase of UK land, don’t get to deduct whole amount if company / partnership has other assets; but if borrow against other assets for other reasons, can deduct part of that borrowing

Second exclusion: loans Purpose – catch situations where shareholder loan used to finance property acquisition so that overall, shares / partnership interest of limited value Paragraph 3 applies to rights of a creditor in respect of a relevant loan, and money / money’s worth held as security, collateral or guarantee for relevant loan, up to amount of loan

‘Loan’ ‘Relevant loan’ – paragraph 4 If money made available under the loan is used to finance acquisition by individual, partnership or trustees of (i) UK residential property interest, (ii) interest in close company / partnership within paragraph 2, or (iii) interest in close company / partnership and acquisition by that entity of either of the above

Extended application ‘Loan’ includes acknowledgment of debt / other arrangement under which debt arises (paragraph 4(6)) Acquisition of UK land includes maintenance / enhancement of value of UK residential property interest (paragraph 4(3)) Applicable where loan used ‘indirectly’ to finance purchase e.g. if purchase shares, shares sold, and sale proceeds used to purchase UK residential property interest (paragraph 4(2)) But where (part of) UK residential property interest sold, (part of) loan ceases to be relevant loan (paragraph 4(6))

Extension of time Where UK residential property interest sold / loan repaid, proceeds continue not to be excluded property for two years: paragraph 5 Includes any money / assets representing what was received