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As an example of persuasive, nail-on-the-head, professional speech writing, George Osborne’s well-rehearsed, Budget-day assertion that the overwhelming desire to pass something on to your children is “about the most basic, human and natural aspiration there is,” takes some beating.

Having established an irrefutable truth, the Chancellor cut rapidly to the focus of his ire and was equally quick to advise just how he would address the problem.

“Inheritance tax was designed to be paid by the very rich,” he said.
“Yet today there are more families pulled into the inheritance tax net than ever before – and the number is set to double over the next five years. It’s not fair and we will act.”

In a long list of iniquitous demands for UK citizens’ cash, inheritance tax (IHT) has long been considered something of a table topper, a death tax levied at a rate of 40% on the value of an estate above the tax-free threshold, frozen at £325,000 per person since 2009. Married couples and civil partners are entitled to double the allowance, passing on assets to their children or other relatives to a maximum value of £650,000 before a tax charge is levied.

Last month, Mr Osborne acted when he confirmed that the UK government would add a ‘family home allowance’, worth £100,000 per person from April 2017, eventually rising to £175,000 at the start of the 2020-21 tax year. In other words, in less than five years, married couples and civil partners will be permitted to pass on assets worth a total of £1 million without paying IHT.

By now, some readers might be scratching their heads, hoping they haven’t missed a Manx government announcement making them liable for IHT and a host of other taxes those folks across the Irish Sea to the east have to pay.

Do not worry. That hasn’t happened, although Mr Osborne’s desire to make IHT less onerous (to a point) will affect British expatriates, a sizeable proportion of whom have either established the Isle of Man as their domicile of choice, or live here periodically and remain UK domiciled. Many expatriates in this latter category may not be aware of the fact that despite physically moving offshore, their worldwide assets may remain chargeable to IHT in the UK.

Of course, a significant proportion of British expatriates legitimately avoid a form of capital gains tax whenever they sell their main UK residence, provided they have spent a minimum of 90 days a year resident in the property, by claiming principle private residence relief (PPR). However, this relief was ‘tweaked’ last year when the automatic exemption from tax on gains in relation to the final years of ownership was restricted to cover only the final 18 months of ownership rather than three years.

This affects thoseexpatswho are having problems selling their home, for example,  (because their property is empty for a period of time) and could result in the capital gains tax exemption being lost, with tax payable when the property is eventually sold.

But what of those residents abroad who buy UK residential property specifically for investment purposes? Will they benefit from the Chancellor’s apparent willingness to see their assets passed on to their children?

In days of yore, the most tax-efficient way by which the resident abroad could build a property portfolio was to acquire it through an offshore company. In such instances, the real estate asset (or assets) was effectively owned by a company in which the expatriate held all, or the majority, of shares. Selling the property triggered in a share transfer, with the property-owning company ultimately sold to a new buyer, a process which ensured that IHT was avoided.

However, Mr Osborne plans to amend these rules, a move which could conceivably result in UK property-owning companies based in offshore jurisdictions such as the Isle of Man becoming liable to  IHT.

“Investment property ownership is a potential tax minefield for British and other expatriates,” says Victoria Carter, head of Sterling Locations, an Isle of Man-based company which helps residents abroad acquire both individual UK properties and larger property portfolios.

“Unless careful tax and trust planning is undertaken prior to acquisition, expatriates could find themselves liable for hundreds of thousands of pounds in inheritance tax. Fortunately, we’re aware of the potential pitfalls and encourage our clients to seek the necessary tax advice before we acquire property on their behalf,” says Victoria.

While the new IHT thresholds may have made residential property ownership potentially less attractive to overseas residents, those investing in commercial property face fewer tax-related obstacles and, as the sector’s long-awaited revival continues, the possibility of capital growth to match that available in some parts of the residential sector has added to its appeal.

A report published by the Royal Institution of Chartered Surveyors (RICS) last month revealed that as business prospects improved, demand for UK commercial property rose for the eleventh consecutive quarter while available space fell for the ninth successive period. The RICS concluded that as a consequence, rents are expected to rise at the fastest pace since its survey began in 1998.

Expats tempted by the commercial property sector must, however, tread carefully for while offices remain the market segment where rental expectations remain buoyant, demand for retail space continues to lag some way behind.

Often one of the prime motivations for accepting an overseas assignment is the opportunity it affords to accumulate significant levels of capital. The expatriate intent on creating a UK property portfolio, be it residential or commercial, who does not wish to hand over a sizeable proportion of their hard-earned in some form of UK tax should, therefore, take appropriate professional advice before making their investment.

© 2022 Sterling is a Registered Business Name of Sterling Holdings Limited. Sterling Trust Limited is registered in the Isle of Man Number 72969C and is licensed by the Isle of Man Financial Services Authority.

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