July 27

New Inheritance Tax on non-Doms’ residential property

New Inheritance Tax (IHT) rules on UK residential property held indirectly by non-UK domiciled individuals or by excluded property trusts

The July 2015 Summer Budget published new Inheritance Tax residential property held indirectly by non-UK domiciled individuals or by excluded property trusts.

The rules come into force in April 2017 and will apply even when the property is owned through an indirect structure such as an offshore company or partnership.

Non-doms’ property

Individuals who are domiciled in the UK are subject to IHT on all their worldwide assets, subject to reliefs and exemptions. However, individuals who are neither UK domiciled nor deemed domiciled for IHT purposes (‘non-doms’) are only subject to IHT on assets they own in the UK. Foreign assets owned by non-doms are excluded from the scope of IHT – such assets are referred to as ‘excluded property’.

UK residential property – the individual

If a non-dom individual dies owning UK property directly, their personal representatives or the beneficiaries of their estate are liable to IHT at 40% on the value of the UK property subject to the usual exemptions. It is irrelevant whether the deceased was resident in the UK or not.

However, as IHT is only charged on UK property directly held by non-doms, it is relatively easy for a non-dom to own such property through an offshore vehicle so as to secure an IHT advantage on UK property in a way not available to a person domiciled in the UK. This is referred to as ‘enveloping’ the property: the offshore company owns the UK property beneficially and the individual owns the shares of the company.

UK residential property – the trust

Once a non-dom becomes UK domiciled or deemed domiciled for IHT purposes, their worldwide assets are subject to UK IHT unless they have been settled into an ‘excluded property trust’ prior to the individual becoming domiciled or deemed domiciled here.

No IHT is charged on the transfer of foreign assets into the trust or at any later date in the life of the trust provided the trust is funded before the non-dom becomes deemed domiciled and the trust does not at any relevant time hold any UK assets directly. Excluded property trusts therefore tend to hold UK property through an offshore company. The settled property is then the foreign shares not the UK property. There is no provision in the IHT legislation to ‘look-through’ the company and charge IHT on the underlying UK property.

The new rules

The new rules mean that trusts or individuals owning UK residential property through an offshore company, partnership or other opaque vehicle, will pay IHT on the value of such UK property in the same way as UK domiciled individuals. The measure will apply to all UK residential property whether it is occupied or let and of whatever value.

The new rules will not change the IHT position for non-doms or exclude property trusts in relation to UK assets other than residential property, or for non-UK assets. Nor will these reforms affect people who are domiciled in the UK.

Technical Application

The IHT charge on indirectly held UK property will be based on the Annual Tax on Enveloped Dwellings (ATED) rules, though these proposals will go further than ATED. ATED is limited to properties with a value of £1m and over (reducing to £500,000 and over from April 2016) and is not charged on properties held by offshore companies (and by certain other entities) that are let at arms’ length to unconnected parties. The scope of the IHT charge will have no such minimum threshold and the various ATED reliefs will not be applicable here.

The intention is that broadly the same properties currently covered by the non-residents Capital Gains Tax (CGT) legislation introduced in Finance Act (FA) 2015 will be subject to IHT. The definitions of UK residential property and the definition for persons chargeable as enacted in FA 2015 for non-residents CGT will be used as a starting point for these reforms with any necessary adaptions where appropriate. As with non-residents CGT, diversely held vehicles that hold UK residential property will not be within the scope of the IHT charge but any closely controlled offshore company, partnership or similar structure will be within the new provisions.

IHT will therefore be imposed on the value of UK residential property owned by the offshore company on the occasion of any chargeable event as defined.


Enveloped properties – de-enveloping

Properties held in companies or other envelopes can be ‘sold’ by transferring the shares of that company. Such a transaction is not subject to any Stamp Duty Land Tax (SDLT). ATED was introduced in Finance Act 2013 to ensure that people enveloping residential property in corporate vehicles pay a price for that privilege by a higher SDLT rate on entry into the corporate structure and ATED.

The new rules will change the IHT treatment, so some non-doms and trusts may wish to remove the envelope and move into a simpler more straightforward structure outside the scope of future ATED charges, ATED reporting or ATED-related CGT. If the property is mortgaged or has increased in value since 2013 there may however, be significant costs in de-enveloping.



July 10

Treasury Licences for Assets under Sanctions



Applying for a treasury license to use assets under sanctions can prove a key move forward for states, sovereign wealth funds and individuals

The UK’s HM Treasury operates a range of financial sanctions that take effect against a “designated person”. This can be an individuals or entities – such as an organisation, company or group. Those designated persons (‘sanctions targets’) are listed in a “Consolidated List” published by the Treasury.

Financial sanctions invariably include asset freezing measures – these mean that funds are frozen by the bank or other institutions involved. Unless licensed by the Treasury a designated person can neither access those funds nor can they be paid or given funds or economic resources. It’s a criminal offence to knowingly – or with reasonable cause to suspect – make funds available to a designated person directly or indirectly.

If a person (whether a designated person or not) needs a licence – for example to make or receive a payment that is blocked by UK financial sanctions – one apply to the Treasury with fully prepared papers giving all relevant information, full details of the transaction and supporting documentation.

The licence can exempt certain transactions from the restrictions of the asset freeze.
Generally there are two sorts of licence:

1. General licences. These are available to every potential beneficiary subject to whatever terms or conditions apply under the sanctions regime concerned; so a general licence allows every transaction, or category of transaction, that is described in the licence to be lawful, whoever the persons who are engaging in them.

2. Individual or specific licences. These are granted to specific parties, and may permit specific transactions or types of spending for example.

Licences can be granted for a range of purposes and may include the allowing the release of frozen funds to pay obligations due by the designated person under a contract entered into prior to their listing, to meet bank charges, to cover basic household or business expenses and reasonable legal costs.

Licences can also allow other arrangements to permit transactions and protect third parties who are not sanctions targets – for example to allow staff salaries to be paid, to allow humanitarian transactions, and to allow the assets of designated persons to be safeguarded and managed.

When considering whether to issue a licence, the Treasury will have regard to the policy objectives of the relevant regime.

Licence applications should be submitted at least four weeks before the licence is needed. Licence applications are dealt with as quickly as possible by the Treasury but do not guarantee that licences will be issued within four weeks of an application being received. There is no charge made by the Treasury to issue a financial sanctions licence.

MS-Legal can safely store the granted licence and produce it for inspection to banks or other parties to a transaction who may ask to see a copy of the licence.
Licences are issued in the light of the known facts of a particular case. The Treasury may amend a licence where the circumstances change or new types of transaction are contemplated.

The Treasury will usually provide an explanation for any decision to refuse a licence and will reconsider refusals if there are new facts. Where a licence is not granted, the transaction concerned cannot legally proceed.

Our experience in dealing with the application process is that it can take between 4 to 6 weeks for the Treasury to consider the application and grant the licence.

June 14

Banks’ due diligence

courtesy of Unsplash.com

On 24th March 2015 The Privy Council issued a judgment which strengthens anti-money laundering principles in the UK and other jurisdictions. The case of Crédit Agricole Corporation and Investment Bank (Appellant) v Papadimitriou (Respondent) (Gibraltar) [2015] UKPC 13 involved a collection of valuable art-deco furniture which was fraudulently sold by someone other than its owner. To “clean” the proceeds of sale, the fraudster used a complex structure of offshore companies, trusts and bank accounts. The court found that these complex financial arrangements were clearly suspicious and should have raised red flags at Credit Agricole bank. Handing down the judgment Lord Clarke found that the arrangements “could not have any commercial purpose other than money laundering”. In such suspicious circumstances, a bank must satisfy itself that there is a legitimate reason for the complex financial arrangements. It is insufficient for a bank to ask simply where the funds came from. In this case, though the bank was innocent of wrongdoing, it was ordered to pay the victim because it had benefited from the transaction and had failed conduct proper investigations in circumstances where the web of offshore companies involved was indicative of money laundering. The court ruled that the bank should be penalised for turning a blind eye to suspect funds.

May 14

Commercial Law: The case of Tael -v- Morgan Stanley



In the Supreme Court case of Tael -v Morgan Stanley, the appeal raised a question of contractual interpretation. The contractual condition formed part of the Loan Market Association standard terms and conditions commonly used in the secondary loan market. There was no dispute as to the relevant legal principles.

The Supreme Court upheld the Court of Appeal’s ruling, dismissing the appeal in a closely argued judgement, the court stating “…The absence of any provisions addressing the possibility of default by the borrower, … [was] … a further indication that it is not intended to confer a right to additional payment.”

Commercial law disputes are complex and time consuming.  By seeking advice at an early stage, various pitfalls can be avoided.