Inheritance Tax and UK residential property: new rules for non-doms

The government has decided that from 6 April 2017, all UK residential property should come within the scope of UK Inheritance Tax (IHT), regardless of where the ultimate owners of the property live or how it is “enveloped”.  If you’re a non-UK domiciled individual who owns UK residential property through relevant entities, you need to be aware of the changes.  So do agents, lawyers and other professionals.

In our pre-election update on taxation of UK domiciles, we predicted that these provisions would be enacted in a post-election Finance Bill. The changes are indeed in the Finance (No 2) Act 2017 which received Royal Assent on 16 November 2017.

What has changed

Previously, the assets of a non-UK domiciled individual (NUKDI) were only subject to IHT if they were UK assets.  Shares in a non-UK company are not UK assets and so it made sense for a NUKDI to hold UK property in a non-UK company.  This meant that on a gift of the shares or on the death of the individual, the property, even though in the UK, was effectively outside the scope of IHT.

That is no longer the case.  Regardless of how a UK residential property is held, its ultimate individual owner or owners will potentially be within the scope of IHT in respect of it.  This only applies to residential property – the rules for commercial property remain unchanged, and so the traditional structure of holding in an offshore company is still effective for IHT purposes.

The same basic rules apply as for UK domiciled individuals – on making an outright gift, no immediate IHT is charged, but IHT can arise if the donor dies within seven years.  The NUKDI is subject to the same 40% tax rate, with the same £325,000 nil rate band.  Gifts to trust that exceed the nil rate band will incur IHT at the lifetime rate of 20%.

So if you’re a NUKDI holding your London house in a British Virgin Islands (BVI) company, on a gift of shares in the BVI company or on your death, IHT will potentially be in point.  It isn’t possible to avoid the charge by having layers of BVI companies, as any company which derives its value from the underlying residential property is caught.  Similarly, if you hold your London property through a partnership or a trust, that will also be within the scope of IHT.


Firstly, where the company owning the property is not a “close company”, then that company’s residential property is not within the scope of IHT.

Secondly, where the value of your interest in the close company or partnership is less than 5% of the value of all the other participators’ interests, your interest is ignored for IHT purposes.  So generally large quoted companies will not be caught, and nor will very small holdings in private companies.

In computing the IHT bill, the company’s debts can be deducted from the value of the property.  If the company has a mix of assets, any liabilities the company has must be attributed “rateably” to the property.

An example

A company has two properties worth £1m each: one commercial, one residential. It also has bank debt of £700,000.  The bank debt must be apportioned 50% to each property, even if the whole mortgage relates to the residential property.  If the company also held £1m of shares, the debt would have to be split three ways, even though the share portfolio might be completely ungeared.

The above appears to apply only to property held in a company. If the property is held directly by the individual, any debt relating directly to the property will be deductible (subject to certain anti-avoidance rules, where a property is refinanced).

Where property is held in a group of companies, it is less clear how liabilities are to be apportioned, although this will probably also be rateably.

All this means that where residential property is more highly geared than other assets, it makes sense to hold that residential property in a separate company owned by the individual or by the individual directly.  Where residential property is less highly geared than other assets, it could be beneficial to hold it in the same company as other property.

The company’s debts can be deducted regardless of whether they are third party bank debts or loans from connected persons, including the individual themselves.  But there’s a sting in the tail: loans made to finance any UK residential property, including loans to close companies and partnerships which own such property, will themselves be an asset within the scope of IHT in the hands of the lender.

Loans and legislation

The legislation seems to catch only loans made by an individual.  Loans made by a company don’t seem to be caught even if the company is close and held by a single individual.

The legislation does refer to loans made directly or indirectly to fund residential property. So if you were to lend your company £1m, which it then lent to another company to buy UK residential property, that would probably be caught.

However, if you were to put equity into your company, which then made a loan to another company to buy UK residential property, it seems that would not be caught.  This also means that banks and companies whose businesses are lending to fund UK residential property should not be within the scope of IHT if their owners are non-UK domiciled.

Non-UK resident trusts

Also within the scope of the new rules are non-UK resident trusts.  This is on the same basis as UK trusts,  i.e. with IHT arising at rates up to 6% on each 10 year anniversary of the trust’s creation and on proportionate or “exit” charges on absolute appointments from the trust.

The position can vary depending on whether the settlor of the trust is a beneficiary of the trust.  If the settlor is, and the trust was created on or after 18 March 1986, there will be a charge to IHT on the settlor’s death under the gifts with reservation of benefit (GROB) provisions in addition to the trust charges we mentioned.

Other countries’ taxes

If you’re a NUKDI living in a country with its own estate or gift taxes, it may be that any UK IHT can be credited against tax in your own country.

However, if you’re a NUKDI in a country without such taxes, the UK IHT will be an additional tax cost.  In that case, if passing wealth to the next generation is important, it may be worth considering whether UK commercial property could be a better choice than UK residential.

Apart from inheritance tax, other UK taxes should be considered, as well as taxes in the owner’s own country.

Enforcement of the rules

How will the government enforce the new IHT rules?  How will it know if the owner of a Panama company has died?  One tool will be the proposed register of beneficial owners of overseas companies that buy UK property.

Although this is primarily an anti-money laundering initiative, it does mean the government will know who owns a property and will therefore see when it changes hands. On discovery they would be able to take enforcement proceedings against the UK property.  So don’t assume they won’t catch up with you!

For more information about how IHT and how we can help you, please get in touch with your usual BKL contact or use our enquiry form.



Sam Inkersole

In 2022, Sam won the Taxation’s Rising Star award at the Taxation Awards in and was named in the Accountancy Age 35 Under 35.

Jon Wedge

While Jon’s client work focuses on the financial services sector, he also oversees the firm’s assurance service, as well as supporting the trainees following in his footsteps.


Elana joined us in 2017 as an ACA trainee, after graduating from Durham University where she had studied languages. She is now a manager in our assurance team.


By submitting this form, the data provided will be used to perform your request according to our privacy policy.