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UK govt to hit non-dom property owners with new inheritance tax rules

Individuals who are not domiciled in the UK, that is those that do not have their permanent home in the country, are generally only liable to Inheritance Tax on their UK property. Their foreign assets are excluded from the charge to IHT on their death or on a lifetime transfer of certain assets and are therefore ‘excluded property.
 
According to law firm Boodle Hatfield IHT is generally charged on the net value of a non-dom’s UK assets after deducting all liabilities, such as debt or loans on property outstanding at the date of charge.
 
However, the firm points out that the Finance Bill 2013 which is expected to receive Royal Assent in July this year, will restrict the deductibility of debts against IHT, where they are used to purchase excluded property.

‘This change has come completely out the blue, with no government consultation. It is going to have an awkward impact on the re-structuring arrangements currently being, or already, implemented to mitigate the new Annual Tax on Enveloped Dwellings and any associated CGT charges on their disposal,’ said Geoffrey Todd, a partner in the firm’s Private Client and Tax team.

He explained that many non-doms are considering taking properties worth more than £2 million out of corporate ownership to avoid these changes, as the government intended. Some owners were seeking instead to borrow against the value of these UK properties to mitigate the resulting IHT exposure on their UK homes.

But these new regulations mean that if these funds borrowed by a non-domiciliary are invested offshore the debt will not be deductible as the loan will be attributable to financing the acquisition of excluded property, which may encourage some to retain corporate ownership after all.

‘The new rules will apply retrospectively and are just one part of a wider package of measures restricting the circumstances in which liabilities can be deducted for IHT purposes.  Individuals with current debt will therefore need to review their existing estate planning arrangements as soon as possible,’ added Todd.

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