Avoiding Inheritance tax for Non UK domiciliaries via an offshore company

Inheritance tax depends on domicile status – as opposed to residence status.

UK domiciliaries are subject to inheritance tax on their worldwide estate.

Non UK domiciliaries are only subject to inheritance tax on their UK estates. Therefore non domiciliaries can hold overseas assets and avoid inheritance tax.

Many non domiciliaries want to hold UK assets which would usually be subject to UK inheritance tax for non domiciled persons (subject to the usual nil rate band – currently £325K for 2011).

However, non domiciled persons could hold UK assets via an offshore company rather than owning them directly. This would then mean that they would be classed as owning the shares in an offshore company – rather than the underlying UK asset. This would then take the UK asset out of the estate of any non domiciliary potentially saving 40% tax.

This can work for non domiciliaries living in the UK or overseas (subject to the points below).

Points to watch out for

  1. The non domiciliary would need to ensure they weren’t also a deemed UK domiciliary for UK inheritance tax purposes. They would be a deemed UK domiciliary if they were UK resident for <17 out of the last 20 years or if they had lost their UK domicile in the past 3 years.
  2. Many non domiciliaries want to own UK property. Using an offshore company to hold this could be highly attractive in terms of inheritance tax. However, there would be other tax implications necessary to consider:

If they occupied the property personally or if a member of their family occupied it they would need to carefully consider whether they would be caught by the income tax benefit in kind rules. These rules effectively impute a taxable rental amount to be taxed due to the provision of the property by the company

If the property was not personally occupied this would not be an issue.

  1. Again, if the property was personally occupied they would be likely to obtain a capital gains tax exemption due to the principal private residence relief provisions when the property was sold.

If an offshore company was used to hold the property, the company itself would be exempt from tax on the gain. However for any UK resident shareholders in the offshore company, the gain in the offshore company could be taxed on them in the UK. They’d then lose the benefit of principal private residence relief.

Therefore care needs to be taken when using an offshore company to hold UK property that will be occupied.

Note that these issues won’t be a problem where the purchasers are non residents or where the property will not be occupied by the owners/their families, but will instead be let out.

Subject to this using an offshore company can be an attractive option to take UK assets out of the estate of non UK domiciliaries.