New UK legislation could hurt UAE-based property investors

London property UAE

If you’re a UAE resident and you’ve invested into property in the UK, you may want to take note of new UK legislation coming into effect from 6 April 2017.

The new law will affect people who live outside the UK but have invested in the UK property market through an offshore corporate structure. And according to Old Mutual Wealth, a wealth management company, such investors may need to take action.

Currently, non-UK domiciles who hold UK property through an overseas corporate structure will benefit from the investment being exempt from UK inheritance tax (IHT) on death. With UK IHT at a rate of 40%, these corporate structures have grown in popularity as investors look to take advantage of the favourable UK property market in a tax-efficient way.

The new legislation will mean the UK tax authority (HMRC) will essentially be able to ‘see through’ these overseas corporate structures, making them ineffective from an IHT planning perspective. As a result, anyone holding UK property through such a structure will have their estate be liable to UK inheritance tax on the asset upon their death, and should seek professional advice on how best to meet this liability.

Wealthy individuals are often asset-rich but cash-poor, Old Mutual Wealth said, so taking steps to ensure liquidity upon death, such as setting up a life assurance policy in trust, could help beneficiaries meet the tax liability.

“There appears to be little awareness among investors for this imminent change in legislation, and could result in beneficiaries being hit with an unexpected tax bill. UK IHT is charged at 40%, so it is important that investors take professional advice to ensure adequate provisions are in place and funds are available to their beneficiaries to pay any future IHT liability,” said David Denton, international technical sales manager at Old Mutual Wealth.

People holding these overseas corporate structures should also seek professional advice to review their next course of action, as without the tax advantages, these structures require careful consideration, the wealth management company added.

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

For people in the UAE, the UK Property market has been a popular investment choice, especially London, where growth continues to be strong. The average house price has risen over 65% in London in the last 5 years. A common way for people living in the Middle East to invest in the UK property market is through these overseas corporate structures or trusts. This process is often referred to as ‘enveloping’.

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