As for today, individuals who are resident but non-UK domiciled
 (“Non-Dom”) are liable to inheritance tax on their UK assets but not on their non-UK assets. Non-Doms have benefited from such a generous advantage by setting up structures in which to hold an UK residential property indirectly through using an offshore company or trust.
The above is broadly known as enveloping real estate property and the structure may be as simple as follows:
Subject “A” was born in Madrid and he is living in London for five years (as a Non-Dom). Two years earlier, he set up a company in Spain, which bought a residential property located in London. Since “A” owns the shares of an offshore company, instead of owning the property itself, he is entitled to avoid IHT liability on death or lifetime gifts as regards the property.
The Hunting of the Envelope
The UK government has recently announced an aggressive switch consisting – among other measures – in clearing away most of the tax advantages enjoyed by the Non-Doms using an enveloped structure. These have included a) theintroduction of the Annual Tax on Enveloped Dwelling (ATED); b) the extension of Capital Gains Tax to non-UK residents making disposals of UK residential property; and c) a flat rate (15%) of Stamp Duty Land Tax (SDLT) for corporate purchasers.
However, the latest reform of all – which is announced to apply from April 2017 – will most probably become the linchpin for the abandonment of the enveloped structures. Namely, we refer to the inclusion of shares in an offshore structure (trust or closed company) owning, directly or indirectly, residential property in the UK as property subject to IHT. Thus, such structures will become no longer valid as such shares no longer be considered as “excluded property” for IHT purposes.
Taking into account the above example, from April 2017 Subject A estate upon death will include – for IHT purposes – the shares in the Spanish company and consequently the UK residential property.
Upfront, it might seem a good idea to undo the whole corporate structure as this does not reflect any apparent advantage. However, before taking the decision to de-envelope, some questions need to be answered Subject to a case-by-case analysis, some of the questions which should be answered before taking such a decision are the following:
- Type of structure:
- What structure do you actually have?;
- Why did you create this structure?; and
- What is the tax regime of the structure?
- Assets / Properties:
- What are the assets owned by this structure?;
- Where are based these assets?; and
- What is the market value of these assets?
- What would be the ideal structure considering the new tax changes introduced by the UK government?;
- What is the cost of de-enveloping the current structure?; and
- What is the cost of continuing as it is now?
At Fitzwilliam, our dedicated team can assist you in the restructuring or reorganisation of your envelope scheme. Even better, we can advise you in the whole process from Spain, not needing to spend time and money travelling to the UK. Contact us today so that you can obtain a further knowledge of your case and of the different alternatives available to mitigate the effects of the recent tax changes.
 Under English law domicile is the place where the individual has its permanent home, although he does not live there at the moment.