HMRC has issued guidance covering changes to enveloped UK dwellings and related finance which took effect from 6 April 2017 and limit the availability of excluded property for inheritance tax (IHT), meaning that some properties which were previously excluded may no longer fall into that category
The new rules limit the availability of excluded property for IHT if the open market value of particular types of foreign assets is attributable to a UK residential property interest (UK RPI).
A UK RPI is an interest in UK land which consists of or includes a dwelling. Types of foreign assets are a right or interest in a close company, or an interest in a partnership.
The effect of these changes is to bring these foreign assets and the value of that property within the scope of IHT.
Relevant loans to finance the acquisition, maintenance or enhancement of UK RPI are made by individuals, trustees or partnerships. If they are foreign loans they cannot be excluded property in the hands of the creditor.
Loans to companies are not relevant loans but are still within the scope of the new rules, because the creditor will be a participator (and therefore the holder of an interest) in the company that owns the UK RPI.
There is a two year restriction on the availability of excluded property for the disposal proceeds or any property representing those proceeds if an individual or a trustee disposes of partnership interests or participator’s rights (or shares) or loans, and receives a repayment of a relevant loan.
This does not apply to a disposal of the UK RPI itself, if it is sold and the loan repaid. That is because the loan stops being a relevant loan when the UK RPI is sold and so the repayment is not for a relevant loan.
The amount restricted is the lower of the value at the date of disposal (or repayment) and the value at the date of charge.
HMRC’s guidance provides a number of examples to illustrate the operation of the new rules.
It also highlights other changes to IHT, which mean from 6 April 2017 IHT will still be charged on enveloped dwellings or relevant loans where either no tax is charged in a non-UK territory on a transfer of value, or there is a tax and its effective rate is 0%.
From 6 April 2017 the charge for unpaid IHT extends to enveloped UK dwellings.
There is short-term transitional relief for chargeable events affected by the new measures. The relevant date for the delivery of an account and the due date for interest will be the later of the current statutory date or end of the month following Royal Assent.
Royal Assent was granted on 16 November 2017, so if there was a chargeable event in April or May 2017 and the due date for payment of IHT was 31 October or 30 November 2017, then the due date is extended to 31 December 2017.
HMRC says more technical guidance and examples about these changes will shortly be published in the IHT manual.
Report by Pat Sweet