Tom Burroughes
20 October 2021
Foreign high net worth individuals inheriting UK-sited property must face the costly shock of not being shielded from UKinheritance tax. Rules have changed the game, and that means that families must arrange to have cash when it’s needed,a wealth manager argues.
UK legislation, backdated to 2017, states that all foreign owners of residential property are liable to up to 40 per centinheritance tax, regardless of what structures (such as special purpose vehicles) they have set up or where they are.Given the multi-million sums involved, HNW individuals outside the UK are in the firing line – the existing threshold onestates for IHT is a relatively meagre £325,000 ($446,284). Gifting property to others means that the tax hit will be less,but comes with its own snags and loss of control. (If a person lives for seven years after making a gift, no tax is due.)
Too many advisors haven’t worked hard enough to warn clients of what they face, Tim Searle, chairman of are failing toinform their clients about the new legislation, the ramifications and all the options open to them including insurance whichfor many years has always been overlooked,” Searle said.
The UK government and its peers are tightening the tax screws, and high net worth individuals, particularly those livingabroad or using offshore structures, are in the firing line. In August, this news service reported that although the numberof non-domiciled residents in the UK had stabilised in the tax year ending in 2020, they paid less revenue into publiccoffers. This suggested that pressure on this category of individual hit revenues in general, as defenders of the non-domsystem had predicted. But that’s unlikely to makethe government change course. And non-doms are only part of thestory, given that so many foreigners from Asia, the former Soviet Union and the Middle East, for example, own property inKensington, Chelsea and other places in the UK.
HNW Individuals must make plans, Seale said.
He argues that insurance-based tools that enable clients to build up cash for when they need to settle IHT bills – avoidingthe pressure of having to rapidly dispose of estates at fire-sale rates – should be on the table.
There is a range of policies available from the Globaleye menu: PPLI (private placement life insurance); ULI (universal lifeinsurance); VUL (variable universal life; WOL (whole of life) and TERM (cover on a specified period with no underlyingpolicy value and no benefits paid after the end-date of policy.) In Globaleye’s case, these insurance structures can bebought in an individual name and corporate structure.
Searle’s firm gives a case study to illustrate the process. A resident (“Mr Ahmed”) is a 55-year-old UAE resident with aprivate investment company (PIC) that owns a £9 million property portfolio; there is no outstanding mortgage. Mr Ahmeduses a property for himself and family and the rest of the properties are rented out. To deal with IHT, Mr Ahmed’s advisorsrecommend that he secures a policy with an assured sum of £4 million – the likely tax hit equivalent. The policy isstructured as a 10-pay premium payment term. The rental income from his properties covers the premiums.
People lack awareness and education about insurance-based solutions, Searle said. Also, lawyers who are involved inthe probate/estate planning process often don’t understand the special circumstances of non-resident and non-domiciledinvestors. Moreover, many liquidity solutions for this special breed of investor are not available in the UK domestic market.International solutions need to be sought from international providers, he said.
Insurance-based arrangements have been around for years, but tend not to feature greatly in wealth management salespitches. However, firms operating in the space include the likes of Swiss Life, Singapore-based Singlife, and LombardInternational Assurance, and this news service has chronicled how these solutions work
These plans have “opened doors” for Globaleye, Searle said. He has already spoken to Middle East-based clients withUK properties about such offerings.
Time isn’t on the side of clients, he said.
The core of the matter is that upon death, those inheriting a deceased person’s estate have a limited time under HMRCrules to pay what they owe in inheritance tax.
“The limited time is actually six months in which the estate has to settle the IHT bill with HMRC. It should be noted that theproperty cannot be sold to pay this bill since the first charge sits with HMRC and they will not release the property for anyactivity until the IHT bill has been paid. If not paid within six months, HMRC reserves the right to fire-sell the asset,typically well below market price,” he said.
The traditional structures aren't fit for purpose today. People can no longer shield estates within a trust if that trust is in theUK or overseas. For example, a BVI or Jersey trust won’t give protection. And the longer a person puts off dealing withthis – such as using the seven-year transfer period to obtain gift status – the worse a potential tax bill will be.
“No structure can protect against IHT. So the options are far simpler in that you either sell the asset, gift the asset orimplement a liquidity solution to pay the IHT bill when, not if, it happens,” he continued.
A matter for concern, Searle said, is that most families don’t want to sell London assets because they are viewed as“trophies” and/or to be used in generational wealth transfer.
Gifting assets, even if the owner has started the process, is not a magic bullet, either. Once the asset is gifted the giftmaker must survive another seven years to avoid paying any IHT. This is also referred to as a PET (Potentially ExemptTransfer) – if a death were to occur in this period there is a potential IHT hit. Legally, with a PET, the gift-maker has nofurther benefit from the asset and the recipient can do what they like. That doesn’t appeal to patriarchs of Asian andMiddle Eastern families
There is also a great potential for friction if families think that they haven’t been properly advised.
“The bigger issue for some of these trustees, most of whom remain unaware, is that they are the legal owner of the assetand as such will receive the IHT bill first before passing it to the family,” Searle said.
“When the family then quiz the trustee as to why they are paying an IHT bill when they thought that their asset wasprotected, the trustee has to confess that the rules have changed and no action has been taken to protect the asset. It isat this point that the legal process of compensation commences,” he continued.
“A family will argue in court, as I’m aware of a case ongoing, that the trustee was the legal owner and had a fiduciaryresponsibility to protect the asset and was paid fees to do so. Failure to notify the family and give them their options onhow to protect the asset is an act of negligence and as such the cost of the IHT bill could be levied on the trustee,” he said.
However, while there are families with potential big problems arising from all this, insurance-based solutions, such asforms of life insurance, offer a way of creating instant cash to pay for tax bills, he said. “Life insurance creates cash whenyou need it most.”
“The UK government loves insurance structures because it means that the tax bill will be paid in a timely manner. Theydon’t want to wait for six months and they certainly don’t want to have to go through the structures to try to unravel theownership issues to then eventually fire sell the asset to recoup the tax. More worryingly for some investors, HMRC willrequire evidence of the source of funds for the property asset. If this is not forthcoming, it will reserve the right to evoke anunexplained wealth order and confiscate the property altogether. We must not forget that there is a grieving family whoare hoping to benefit from these assets at a period which is highly sensitive for them, and to receive further troubling newsof this nature is devastating for any ongoing relationship with a professional service provider,” he said.
“We have been providing estate planning services for the last 20-plus years, predominantly to UK domiciled clients. But,in light of this new legislation, our horizons have increased massively and, as such, we have the capacity, expertise,geographical footprint and access to all the major providers to deliver liquidity solutions that complement the advisoryprocess and protect the client accordingly."
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