Inheritance tax and UK property

tax payer

How will Inheritance tax impact my investment? This article highlights some of the key points for you to consider when it comes to Inheritance Tax in the UK.

If your property investment strategy is to hold your property over the long term, an aspect you may need to consider when estate planning is how your property will be treated from an estate or inheritance tax perspective.  

ESTATE PLANNING IS PARTICULARLY COMPLEX – Please note that we are not tax advisors, financial advisors or wealth managers.  For independent professional advice you must speak with an independent professional specialist.  

Several countries have various estate and inheritance taxes, such as Japan, South Korea, France, United States, Spain, Ireland, Belgium, Germany, the Netherlands, Greece, Chile, Denmark, Finland, Iceland, Poland, Switzerland, Turkey and the United Kingdom.

Australia, Austria, Canada, Israel, Italy, Mexico and or New Zealand do not have any estate or inheritance taxes.

UK Inheritance Tax

Inheritance Tax (IHT) is the tax charged upon death or, in some cases, on the transfer of capital from one individual to

another. The estate of an individual domiciled in the UK is subject to IHT on all of their worldwide assets.   

The exposure of non-UK domiciled individuals was widened under the legislation that took effect in April 2017.  From 6 April 2017, the estate of a non-UK domiciled person includes: 

  • UK situated residential property directly owned by an individual 
  • A share of a partnership that owns UK residential property 
  • Shares in an overseas company that owns UK residential property 
  • A non-bank loan provided to finance the purchase of UK residential property or collateral provided for such a loan. 

In addition, shares in a UK company are UK situated assets and the entire value attributable to such shares forms part of the deceased’s Estate, not just that part of the value attributable to UK residential property. 

The changes are effective for all chargeable events which take place from 6 April 2017.  These events include the following:

  • The death of an individual who owns any interest in UK residential property at the date of their death
  • The death of an individual who has made a gift of an interest in UK residential property within 7 years prior to their death
  • The death of an individual who owns shares in a UK company or has made a gift of such shares in the 7 years prior to their death
  • The transfer of an interest in a UK residential property or shares in a UK company to a Trust. 

The estate not only includes assets held at the date of death but any gifts made by the individual in the 7 years leading up to that point.  IHT is currently charged at 40% on the total value of the estate subject to the tax; the first £325,000 (known as the ‘nil rate band’ or ‘NRB’) is not subject to tax.  The unused portion of an individual’s NRB can be transferred and utilised on the death of their spouse. It cannot be transferred to any other family member or to an unmarried partner. 

inheritance tax - UK

The value of the asset taken into account when calculating the IHT due, is the equity in the property – this being the market value at the date of death less any outstanding mortgage. In order to obtain a deduction for IHT purposes, the property needs to have been bought at the outset with mortgage finance or a mortgage taken out later to enhance the property or purchase other chargeable UK assets. 

Under anti-avoidance rules, there is no deduction for any debt incurred after the property is purchased where it is incurred to acquire assets that are not chargeable to, or are relievable from, IHT.  Thus, no IHT relief is normally available for the debt where a property is acquired for cash and a mortgage taken out subsequently to acquire non-UK assets which are outside the scope of IHT. 

Can I give my property to my partner?

Property passing between spouses who are either both UK domiciled or both non-UK domiciled are not subject to UK IHT.  In addition, a transfer of assets from a non-UK domiciled spouse to a UK domiciled spouse is also not subject to UK IHT.  

However, the transfer of assets between a UK domiciled spouse/civil partner to a non-UK domiciled spouse/civil partner is within the scope of IHT once the transfer has exceeded a spousal limit of £325,000. This spousal limit of £325,000 is in addition to the NRB of £325,000. In order to benefit from unlimited spousal relief, it is possible for a non-UK domiciled spouse to irrevocably elect to be treated as a UK domiciled spouse for IHT purposes only if such a cap would crystallise a chargeable transfer.   

The potential impact of IHT can also be mitigated by life insurance to meet the potential IHT or by gifting prospective beneficiaries an immediate interest in the property.   An independent financial advisor will be able to help you. 

In addition, since April 2017, Trusts established by non-UK domiciled individuals to acquire UK residential property will potentially face trust IHT charges every ten years. The amount of charge is scheduled to be at 6% on the ten year anniversary of when the Trust was created.

ESTATE PLANNING IS PARTICULARLY COMPLEX – for independent professional advice you must speak with an independent specialist.  Remember, this guide only applies to the UK.  At the time of writing there is no Estate or Inheritance tax in Australia or New Zealand. 

We hope you have found this article useful, feel free to comment or ask any questions.  For more information on about overseas investment property check out our other articles and request your copy of our Buyers Guides from [email protected]

Important notice:  Proptech Pioneer and its associated companies seeks to provide investors with guides, information and tools, but we cannot guarantee this information to be accurate or perfect.  You use the information at your own risk and accept no liability if you rely on this information.   Proptech Pioneer is not a tax advisor, conveyance, lawyer, financial advisor or mortgage advisor.  You should seek independent advice from independent professionals before making any investment decision