Why it's important for foreign property investors to understand the UK's recent tax changes

UK property has remained popular with investors from all over the world, particularlythe UAE. London is considered a safe haven and an attractive destination forinvestors perhaps more than any other major city in the world, some would argue.With its solid track record, clear legal title and lots to do, it remains a favouritedestination for property investment, particularly for GCC families.

When buying in the UK, depending on the level of investment, well-advised foreigninvestors would use structures to reduce their exposure to taxes. Typically, propertywould be purchased using various structures such as trusts, special purpose vehiclesor similar offshore corporate structures. For many years, this was the standardmethod to buy UK property to alleviate exposure to capital gains andinheritance/death taxes

However, recent tax changes mean this is no longer the case.

Back-dated legislation to April 6, 2017, means that non-domiciles and non-residentsowning UK property indirectly through corporate structures, purchased either beforeor after this date, are liable for UK death tax at 40 per cent

This tax is based on the value of the property at the time of death and must be paidbefore the asset can be passed on to the family, heirs or estate. Moreover, this tax billmust be paid within six months, otherwise Her Majesty’s Revenue and Customsreserves the right to fire sell the asset to recoup the unpaid tax.To make matters worse, the asset cannot be sold by the family to meet the death taxbill. This must be paid in cash to HMRC before the family has access to the asset.

The government sought to increase the taxes on UK property held through structuresby introducing a raft of anti-avoidance measures aimed at property that is heldindirectly

Consequently, all recent structures typically used by GCC investors are now nolonger effective in protecting residential property from the 40 per cent death tax. So,what can you do to protect your UK property assets? The options are pretty slim butin basic terms, they are as follows:

• Sell the property: This is not always attractive since many are legacy andintended to be passed down the family. Similarly, UK property prices are soft atpresent and the best price may not be achieved. Also, the seller must survive foranother two years after selling to stay outside of this tax
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• Gift the property: Disconnect your legal right to the asset and then ensure yousurvive seven years to avoid any tax on your part. This is not always popular for GCC families since the patriarch prefers to retain control right until their demise.Also, the person receiving the gift is now liable for the death tax bill on their demise.
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• Liquidity solution: In simple terms, an insurance policy that will pay the death taxbill when it will happen. Insurance policies create cash when you need it the most,so this is a cost-effective solution to protect the asset for future generations, retaincontrol and avoid paying this tax to HMRC from other assets

Few property investors are aware of this revised legislation, the impact on theirresidential property portfolio and how to plan for it. Whether the property has amortgage, or you intend to gift the property to other members of your family, thereremains a hefty 40 per cent bill if you don’t plan for it.

The asset cannot be sold by the family to meet the death tax bill. This must be paid in cash to HMRC before the family has access to the asset
Tim Searle

Moreover, wealthy families have complex affairs andin the event of their demise, access to capital isdifficult while probate in multiple jurisdictions takesplace. Couple that with an additional layer ofcomplexity with Sharia and obtaining cash when youneed it the most could be delayed, resulting inHMRC taking matters into its own hands.

Working collaboratively with lawyers, family offices,fiduciary agents and/or financial advisers to reach asolution that creates money to meet the death taxliability when triggered is essential. This ensures theproperty assets are passed swiftly to thefamily/estate as intended and does not result inHMRC fire selling it to recoup the tax. The solution isrelatively straightforward, low-cost and more than mitigates the potential cost of thedeath tax bill.

UK property, in particular London, is likely to continue to be an attractive destinationfor investors. Recent statistics show there is more than £35 billion ($49bn) worth ofLondon property held through British Virgin Islands structures alone.

Tax bills can always be mitigated but there is no getting around it anymore for foreignbuyers of UK property. So, it means careful planning beforehand with yourprofessional partners to ensure your UK property assets are passed on as intended.

Tim Searle is the chief executive of Globaleye