UK Property Purchase
Mr. Z, a foreign national, owns two properties in London worth £1 million each. He now wishes to purchase a third investment property worth £2 million in London.
Many UK non-domiciliaries (generally speaking people not born in the UK) believe they fall outside the scope of UK Inheritance Tax (IHT). This is not the case. The general rule is that the death of the owner of UK-situated property gives rise to a charge to UK IHT irrespective of the domicile or residence of that owner.
The current rate of IHT is 40%, although the first £263,000 of an estate is exempt. It is important to note that the value of all property and assets situated within the UK must be aggregated and IHT is payable on the total. So in this case the IHT bill would be 40% of £3,737,000, or £1,494,800!
If the property is purchased in the name of a non-UK company then, because corporations do not "die" provided they are kept in good standing, UK IHT is avoided.
On purchasing property in a corporate name, the shares of the corporation become part of the estate of
the ultimate beneficial owner. It might therefore be the case that IHT is assessed on these shares in accordance with the rules applicable in the owner's home jurisdiction and/or the jurisdiction of incorporation of the company. Some further planning may be necessary to eliminate that tax as well.
The property currently owned in the name of Mr. Z could be transferred to the offshore company without tax consequence, because the UK, unusually, does not charge CGT on property sales by a non-resident. Stamp duty would apply if the transfer is made by way of sale but not if the transfer is made by way of gift.
There would be some benefit in having each property owned by a separate company so that a subsequent sale of a property could be achieved by way of a transfer of the shares in the property-owning company. This may give the purchaser the opportunity of avoiding stamp duty and therefore increase the potential value of the property.