A new UK legislation, which comes into effect on April 6, is likely to impact thousands of non-UK domiciles in the Middle East who have invested in the British property market through an offshore corporate structure, said an expert.

For people in the region, the UK Property market has been a popular investment choice, especially London where growth continues to be strong. The average house price has risen over 65 per cent in London in the last 5 years, according to Old Mutual Wealth, a leading wealth management business in the UK.

A common way for people living in the Middle East to invest in the UK property market is through an overseas corporate structure or trust. This process is often referred to as ‘enveloping’, it stated.

Currently, non-UK domiciles who hold UK property through an overseas corporate structure will benefit from the investment being exempt from UK inheritance tax (IHT) on death, said the statement from Old Mutual Wealth.

With UK IHT at a rate of 40 per cent, these corporate structures have grown in popularity as investors look to take advantage of the favourable UK property market in a tax efficient way, it stated.

The new legislation will mean the UK tax authority (HMRC) will essentially be able to ‘see through’ these overseas corporate structures, making them ineffective from an IHT planning perspective.

As a result, anyone holding UK property through such a structure will have their estate be liable to UK IHT on the asset upon their death, and should seek professional advice on how best to meet this liability, said the property expert.

Wealthy individuals are often asset rich but cash poor, so taking steps to ensure liquidity upon death, such as setting up a life assurance policy in trust, could help beneficiaries meet the tax liability.

People holding these overseas corporate structures should also seek professional advice to review their next course of action, as without the tax advantages, these structures require careful consideration, it added.

"There appears to be little awareness among investors for this imminent change in legislation, and could result in beneficiaries being hit with an unexpected tax bill," remarked David Denton, the international technical sales manager, Old Mutual Wealth.

The new legislation essentially brings the IHT rules between UK domiciles (UK expats) and non-UK domiciles investing in UK property into line.

UK expats have never been able to invest in these offshore structures to avoid UK IHT, and have always been liable to UK IHT on their UK and worldwide assets on death, explained Denton.

Estate planning, he noted. is an important consideration for UK expats, who look to mitigate their IHT exposure and help ensure beneficiaries have liquidity to meet any tax bills on death.

According to him, this same level of estate planning is now necessary for non-UK domiciles investing in the UK property market through an offshore structure, as many may now need to plan for a future IHT liability for the first time, he added.

UK IHT is charged at 40 per cent, so it is important that investors take professional advice to ensure adequate provisions are in place and funds are available to their beneficiaries to pay any future IHT liability, he added.-TradeArabia News Service