Summer 2015 Budget: effect on property owners

The Budget Statement includes a number of changes which may particularly affect investment in UK property.  However the Budget proposals may be subject to change before becoming law and the comments below should be read in that light.

Non-domiciled investors holding UK residential property

Current position

At present, assets held by an individual who is domiciled outside the UK (a “non-dom”) are potentially exposed to UK Inheritance Tax (“IHT”) only if the assets are situate in the UK.  Thus UK land or buildings held directly by a non-dom are at risk; but it is relatively easy for a non-dom to keep such assets outside the scope of IHT by holding them via a non-UK company – so-called “enveloping” of UK property.

The proposed change

From April 2017 such structures (including any existing structures already in place) will not be effective in avoiding IHT.  Any UK residential property which is directly or indirectly owned by a non-dom will be within the scope of UK IHT.  Note that this change will not be limited in its applications only to owner-occupied property: it will apply equally to let property, even if let on commercial terms to unconnected tenants; and to vacant property.  There is no de minimis limit: in principle property of any value will be covered.  However, there is no intention to change the IHT position for non doms in relation to UK assets other than residential property, or for non-UK assets.  It will thus continue to be possible, for example, for non-doms to ensure that UK commercial property remains outside of any IHT charge by “enveloping” it in within an offshore company (though UK commercial property held directly will continue to be within the scope of UK IHT, as it always has been).

Next stages

A consultation document will be published after Parliament’s summer recess to seek views on the best way to deliver these reforms and a further consultation will follow on the draft legislation which it is intended will come into force from 6 April 2017.


The intention is that the type of property covered by the new rule will be broadly the same as that covered by the existing CGT charge on non-residents introduced by Finance Act 2015.  So we would expect that houses, flats etc would be covered, but that certain types of communal residential property will be excluded from the charge. These should include accommodation used as a children’s home; care homes for those in need because of (e.g.) old age or disability; communal accommodation for members of the armed forces; prisons and similar establishments; and “Purpose Built Student Accommodation” (though we would expect that houses that merely have rooms let out to students would be within the charge).

Bare land and residential property being converted to commercial use should be regarded as non-residential and outwith the scope of the charge.


The principal effect of bringing assets within the scope of IHT is that a charge to tax at 40% will arise on the value of the property on the death of the individual owning it, subject to the availability of a “nil rate band” currently £325,000.  Other charges may arise on certain lifetime transfers.

It appears that, broadly speaking, the legislation is intended to operate by treating as UK property a shareholding in any company to the extent that the value of the company is attributable to ownership of UK residential property (less borrowings taken out to purchase such property).  Value attributable to non UK assets such as foreign land or equities or to UK commercial property will not be within the IHT charge.  There will be an exclusion for “diversely held vehicles” but any closely controlled offshore company, partnership or similar structure will be within the new provisions.

Under the new rules, IHT will be imposed on the value of UK residential property owned by the offshore company on the occasion of any chargeable event. This would include:

  • the death of the individual (wherever resident) who owns the company shares,
  • a gift of the company shares into trust,
  • the ten year anniversary of the trust,
  • distribution of the company shares out of trust,
  • the death of the donor within 7 years of having given the company that holds the UK property away to an individual or
  • the death of the donor or settlor where he benefits from the gifted UK property or shares within 7 years prior to his death. The reservation of benefit rules will apply to the shares of a company owning UK property in the same way as the rules currently apply to UK property held by foreign doms and generally to UK doms.

The same reliefs and charges will apply as if the property were held directly. Hence a deceased individual who owned the company shares directly will have the benefit of spouse exemption if the company shares are left to a spouse.

HMRC recognise that where UK residential properties have been “enveloped” to shelter them from IHT, some non-doms and trusts may now wish to remove the envelope and move into a simpler more straightforward structure.  The government has committed to “considering the costs associated with de-enveloping and any other concerns stakeholders may have” during the course of the consultation.


Until the consultation period is over and we have seen the detail of the proposed legislation it is premature to consider what planning may be appropriate.  It may well be that one option to be explored is the minimisation of the net value attributable to UK property (or to shares in companies holding UK property) by use of debt; non-doms buying UK residential property over the next few months may therefore want to consider funding the acquisition as far as possible with borrowed money, leaving their own funds invested primarily in assets outside the scope of UK IHT.  For property already owned, refinancing in this way would need to take account of the anti-avoidance rules introduced by FA 2013 regarding deduction of liabilities indirectly attributable to the financing of excluded property, and other strategies may need to be devised.

Buy-to-let investments

The other major property-related changes in the Budget statement will affect “buy-to-let” investors in residential property (whether in the UK or overseas).  Investors in commercial property are unaffected; as are investors in properties which meet the criteria to be treated as furnished holiday lettings.  There are two separate changes.

Wear and Tear

The first change relates to the “Wear and Tear” allowance for furnished lettings.  It applies to companies as well as to individual landlords (but not to furnished holiday lettings).  At present, the costs of replacing furniture and fittings are not tax-deductible.  Instead, a notional deduction is given for tax purposes equal to 10% of rents.  HMRC seem to consider that in many cases this is over-generous and from April 2016, it is intended that the 10% deduction will be abolished and instead tax relief will be given for the actual costs of replacements.  Note that this change does not affect tax relief for expenditure on routine repairs to the property, including furniture and fittings in it, which will continue, as now, to be tax-deductible in full.

Financing costs

The second change is in relation to “finance costs” such as mortgage interest, interest on loans to buy furnishings and fees incurred when taking out or repaying mortgages or loans. Starting from 6 April 2017 (and phased in over 4 years from then) tax relief for these costs will be restricted the basic rate of Income Tax.  This restriction will apply to individuals (presumably including individual members of partnerships or LLPs) only.  It will not affect companies, but the position of trusts is not yet clear.  No Income Tax relief is of course in any event available for capital repayments of a mortgage or loan.

Instead of deducting finance costs from rents to arrive at taxable profits, landlords will instead receive relief in terms of tax by deducting an amount equal to tax at the basic rate on the finance costs from the tax otherwise chargeable on the profits.  If the tax deduction for finance costs exceeds the tax otherwise payable on the profits the excess can be carried forward and used in subsequent years.

The change will be phased in so that for 2017/18 the new rule will apply to 25% of the finance costs (with the other 75% being deducted in computing taxable profits as now); for 2018/19 the restriction will apply to 50% of the finance costs; for 2019/20 to 75%; and from 6 April 2020, 100% of the finance costs will “disallowed” and dealt with under the new rule.

Although its impact is ameliorated by the delayed and phased introduction, this change will significantly change the economics of some buy-to-let portfolios.  Since the change does not affect companies, one response may be to consider adopting a limited company structure.  But there are many factors to consider in choosing the right structure, summarised in our recent briefing and the position is further affected by the change from April 2016 in the way in which dividends are taxed, also announced in the Summer Budget.  The tax credit attaching to a dividend will be abolished and dividends will be taxed as normal income albeit at special rates of tax (with exemption for the first £5,000 of dividends).  Broadly, this will increase the effective rates of tax on dividend income by 7.5% across the board.

For more on any of the matters covered here, 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.


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