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Gulf property buyers in the dark over UK ‘death tax’

Wealthy London districts such as Kensington are attractive to Gulf investors, but they must consider the tax implications of buying property there Unsplash/Robert Bye
Wealthy London districts such as Kensington are attractive to Gulf investors, but they must consider the tax implications of buying property in the UK
  • UK inheritance tax as high as 40%
  • Many Gulf investors unaware of it
  • £2.5bn Gulf investment in UK property expected in 2024

Whether it is a second home in Kensington or an apartment for their children studying at university, Gulf investors have spent billions on UK property over the decades – but many are oblivious to the tax implications, especially when it comes to inheritance tax.

His Majesty’s Revenue & Customs (HMRC) applies 40 percent inheritance tax on properties in the UK valued over £325,000 ($413,535) upon the death of the principal owner.

This applies to any value above the £325,000 threshold, so if the house is worth £400,000, the estate pays tax on £75,000.

The tax is applied regardless of whether the owner is a British citizen or a Gulf national, or whether the property is bought in the owner’s name or through any type of offshore company or trust.

“Most buyers are unaware of this levy and don’t even think to ask about any tax implication, be it capital gains or inheritance,” says Amit Seth, managing director of Qima Real Estate, a Dubai-based company set up last year to help Gulf investors buy UK property.

Bank of London and the Middle East (BLME), one of Europe’s largest Islamic banks, estimates that Gulf investors will invest £2.5 billion in UK property next year.

Most of this will be spent on commercial property, where the rules are more complex.

However, Michael Gabbitas, head of private banking at BLME, agrees that many wealthy Arabs buying second homes or holiday homes in London in their own names may be unaware of HMRC rules.

“Even though they may have significant wealth, some of them do not understand about the tax implications in the UK and, without the proper advice, they may go headlong into doing something without taking it into account,” he says.

Gabbitas points out that UK real estate agents work for the seller and their fee is a percentage of the final sale price. Although they have various legal obligations to buyers, telling them about the inheritance tax implications of a purchase are not among them.

“Generally speaking, you could find yourself not getting any help from the agent that’s selling the property, because they’re just getting their commission and that’s it,” he says.

Some Gulf investors have found themselves in hot water with HMRC. A source told AGBI about an Emirati family who bought a multi-million-pound mansion in an upmarket suburb of London.

The house was seized and sold by the Revenue for non-payment of inheritance tax after the death of the principal owner. HMRC reportedly took its 40 percent and the rest was forwarded to the Emirati heirs of the estate.

Offshore companies and trusts need to pay too

Some foreign investors buy UK property through a trust or offshore company, but these structures come with tax obligations too.

In 2013 the UK government introduced annual tax on enveloped dwellings (ATED), a levy payable by companies that own a residential property in the UK worth more than £500,000.

AGBI knows of another wealthy Gulf-based family that owned a £20 million UK mansion and are now suing their legal advisers for not telling them about or managing their ATED obligations. The family was landed with an HMRC bill in excess of £1 million.

Geoffrey Todd​, partner at London-based law firm Boodle Hatfield, points out that there are ways Gulf investors can legally reduce their UK inheritance tax obligations.

“They can legitimately save inheritance tax by using the spouse exemption, purchasing with a mortgage, or spreading ownership among the family. These are all available to any investor from the UK or elsewhere,” he says.

Tim Searle, chairman of Dubai-headquartered Globaleye, has been advising high net worth individuals in the Gulf for more than 20 years.

He warns that inheritance tax does not just apply to houses but to any assets Gulf investors may have in the UK, including bank accounts, classic cars, sports cars, watches, artwork, jewellery, or antiques collectively worth more than £325,000.

An election hot topic

Inheritance tax is set to be a big issue in the UK’s next general election, expected in late 2024 or early 2025.

The Daily Telegraph newspaper is calling on the government to abolish inheritance tax and has gained the support of over 50 Conservative MPs.

Speaking to AGBI last month, Dominic Johnson, a minister of state in the UK’s Department for Business & Trade, said he was in favour of a low-tax, free market regime.

“I’m always encouraging my fellow ministers to find ways to reduce the tax burden on companies and individuals. That should be the moral direction of all governments,” he said.

Gabbitas believes abolishing the tax would have “a dramatic detrimental effect” on businesses like BLME.

“I don’t think it would kill it off completely, because there are other factors to consider, but I think it would have a negative effect on banks who provide finance to Middle Eastern clients,” he says.

The opposition Labour Party is in favour of tightening the inheritance tax rules. David Lesperance, a tax and migration adviser to wealthy individuals, says such a move would affect foreign investors’ appetite for UK property.

“Current owners will sell these assets, pay the capital gains tax and take the proceeds out of the UK tax system. New purchasers are going to weigh reduced prices versus future inheritance tax,” he says.

Regardless of who is in government, however, Todd believes “the advantages of investing in the UK outweigh the disadvantages”.

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