London has been a hotspot for investors from the Middle East Image Credit: Gulf News Archives/Pankaj Sharma

If you invest in property in the UK, an upcoming change in tax legislation could have an impact on you. The change will affect investors who are non-UK domiciled and have invested in the UK property market through an offshore structure. The change is significant: the UK tax authority, Her Majesty’s Revenue and Customs (HMRC), will take up to 40 per cent of the value of a property when the owner dies – so it is important that investors understand what the changes are. The UK property market, especially London, where growth continues to be strong, has been a popular choice for investors from the Middle East. According to the Office of National Statistics’ house price index for December, the average house price in London has risen over 65 per cent in the past five years.

A common way to invest in the UK property market is through an offshore company structure or trust. The main reason why this has been so popular is that property held through the offshore structure is exempt from UK inheritance tax (IHT) on death. With UK IHT set at a rate of 40 per cent, this tax saving is significant and has enabled investors to take advantage of the favourable UK property market in a tax-efficient way.

What will change

However, this is all set to change as new legislation being introduced on April 6 will mean that HMRC will essentially be able to “see through” these offshore structures and charge IHT on the assets on death.

If you are affected by this change, it is important that you seek professional advice. Together with your financial adviser, you will need to consider how your beneficiaries, for example, your children, will pay the 40 per cent IHT bill on your death. If it is unlikely that your beneficiaries will have enough cash available to pay the IHT bill, it could become difficult for them to access their inheritance, as the process requires them to pay the IHT bill before the assets are released.

So, for example, if you invest in a property portfolio in the UK through an offshore company structure, and the property portfolio has a value of £3 million (Dh13.52 million), the IHT charge will be £1.2 million. This highlights just how significant this change is – what was previously a zero tax liability will become a £1.2-million tax liability!

Life insurance policy

One solution you could look at with your financial adviser is setting up a regular premium life assurance policy and placing it in trust for your beneficiaries. This will help ensure that on your death, the life assurance policy will pay your beneficiaries a cash lump sum, which they can then use to help pay the IHT bill. Placing it in trust is a crucial step, as it means funds will become payable to beneficiaries instantly, without the need for probate.

You could also look into whether a single premium life assurance policy, which provides both a high death benefit and investment growth, is suitable. This may allow you to use the shares in the offshore company structure to fund the policy premium. The high death benefit will help ensure there is money available to pay the future IHT bill, and the shares can be passed on to future generations.

This new legislation essentially brings the IHT rules between UK domiciles and non-UK domiciles investing in UK property into line. UK domiciles have never been able to invest in these offshore structures to avoid UK IHT, and have always been liable to UK IHT on their UK and worldwide assets on death.

Estate planning is an important consideration and is something UK domiciles are more familiar with. This change in legislation will make estate planning an important aspect for more people, and many non-UK domiciles will now need to plan for a future UK IHT liability for the first time.