This article was originally published on SCMP.com
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UK property continues to benefit from strong interest from foreign investors, especially those from Hong Kong seeking a path to citizenship. London, specifically, has always been attractive, as it consistently features among the top three cities in the world for prime property investments.
Asian investors are driving this trend, as they are particularly attracted to the flexibility and potential returns, through either capital appreciation or recurrent income, that diversification through this asset class offers. The trend will accelerate over the coming years, as wealth across the Asian region grows.
Challenges to the UK market, whether it be Brexit or the additional 2 per cent Stamp Duty Land Tax surcharge for overseas buyers from April next year, are unlikely to have a lasting impact on the attraction of investing in UK prime residential property.
A combination of currency weakness, record low lending rates, demand outstripping supply and uncertainty in the global financial markets, will further motivate foreign investors to make that UK property purchase sooner rather than later.
However, many of these investors and their advisers fail to realise that by acquiring the residential property in the UK, they also acquire a latent 40 per cent inheritance tax (IHT) liability, regardless of their residence or domicile status.
Not many are aware that this applies to properties that are either directly or indirectly held, via offshore companies or trusts, for example. This last point, applicable since April 2017, encompasses existing ownership structures and may be one that many, who have held the property for a number of years, are unaware of. This may be true for investors from countries such as China or Malaysia, where estate taxes do not exist.
Furthermore, where property owners are conscious of the latent liability, how many of them have taken the time to plan for it – deciding instead to defer as something that will need to be tackled at some point in the future? Recent events have given all time for reflection and to consider options to protect and preserve family wealth for future generations.
Estate and succession planning to ensure there is adequate liquidity to meet IHT requirements is essential. Having no appropriate plan may cause an unwelcome burden for beneficiaries to deal with, which may prompt a fire-sale of the property itself or indeed other family assets at an inopportune moment to pay the taxes.
Take for example a £10 million (US$13.3 million) house in Central London. This would require the owner to ring-fence significant amounts of otherwise investible capital for a property bought many years ago, that has steadily appreciated and now threatens a IHT bill of around £4 million. The IHT liability has the potential to cause unexpected and very large liquidity issues for future beneficiaries.
There are a number of options available to Asian private investors to efficiently structure and manage their wealth and succession planning needs, including highly effective solutions specifically dedicated to liquidity planning to cover potential IHT liability.
One such solution is the International Life Plan, specifically designed for non-UK residents with assets in the UK, which uses traditional life insurance to provide pure protection to key parts of their financial legacy and efficiently manage their estate planning.
Keeping it simple, this solution is suitable for both individuals and entities, providing for a fixed, defined coverage in UK currency, matching the liability in sterling and removing any foreign exchange risk. It covers international lives assured, on a single or joint basis, especially relevant where property ownership is shared between husband and wife, and with level annual premiums guaranteed for the duration of the policy, either fixed or whole-of-life term.
The International Life Plan is a simple and effective solution that should be firmly placed in the wealth planning toolbox for Asian investors.
Head of Business Development Asia
Lombard International Assurance