For desis with homes in UK, no escaping nheritance tax
Lubna Kably
Mumbai:
High net-worth indi viduals who have invested in residential properties in the UK, will now have to deal with the issue of inheritance tax, which their heirs are unlikely to escape from.
In its budget introduced in Parliament in June, the UK plugged a loophole that enabled foreign property buyers to avoid inheritance tax. Such avoidance was possible by routing property investments in the UK via an offshore firm or by using a dual structure of an offshore trust and offshore company for investments in British properties. The budget proposals are expected to be finalized by October.
TOI had, in an earlier article, cited figures from the UK's land registry showing that non-UK based Indian buyers spent almost £450 million (a little over Rs 4,400 crore) purchasing some 221 residential properties in prime central London, with the three most popular locations being Mayfair, St John's Wood and Belgravia. From April 2017, any hold ing structure will effec tively be treated as a look-through and all British residential property will be subject to UK inheritance tax.Thus, heirs of Indian-resident property owners will be required to pay inheritance tax regardless of any tax planning undertaken. The new rule is designed to counter offshore tax structuring, which enabled avoidance of inheritance tax on UK residential property ,“ explains E&Y (UK) tax director Kannan Raman.“Shares held in the offshore company , were a non-UK sited asset for inheritance tax pur poses. Thus the value of the property , fell outside the UK estate inherited by the heirs and IHT was not trigged,“ he said.
A dual structure, where an offshore trust held shares in an offshore company , which in turn owned UK property was also used, if there was a possibility of the Indian resident investor becoming a UK tax resident in the future.
In this case, the trustees were appointed in a favourable low tax countries (like Jersey , British Virgin Islands, Cayman, Mauritius) and managed the assets, including the UK property . Currently , the value of UK estate, above the nil-rate (exempt) band of £325,000 or ` 3.25 crore, is subject to IHT at 40%. Wetherell, a Mayfair real estate agent has highlighted that Indian buyers typically spend anything around £1-20 million (Rs 10-200 crore) on purchasing a home in Mayfair, with 70% buying an apartment or penthouse and the balance acquiring a mansion.This means that in the coming years, heirs will have to cough up substantial IHT.
Jeremy McGivern, founder of Mercury Homesearch, London's property search agents says: “This budget proposal is unlikely to have a major effect on the core London market. London will continue to be attractive for international and Indian property investors“.
