Financing UK Residential Property Print

Prior to the Budget on 11 March 2008, if a non-domiciled individual wished to purchase a residence in the UK, a tax-efficient way of funding this was by taking an overseas bank loan secured on the UK property. This had two advantages:

Firstly, the interest could be paid to the overseas lender out of overseas income or gains without giving rise to a UK tax liability, although no capital outstanding on the mortgage should be repaid out of overseas income or gains as this would be regarded as a remittance.

Secondly, in the event of the death of the individual, the loan outstanding on the property will reduce the value of his estate in the UK for Inheritance Tax (“IHT”) purposes. For this treatment to be obtained, the loan must be secured on the UK property.

The above treatment continues for mortgages that were already in existence on 11 March 2008 for the remaining period of the loan, or until 5 April 2028, whichever is the earlier. If in the intervening period the terms of the loan are varied, or further advances made after 12 March 2008, then to the extent that the interest payments are made out of offshore income, or gains, they will be treated as remittances from that point forward.

Where an offshore loan is acquired on or after 4 August 2014 and the loan is secured on overseas income or gains then, any part of the loan which is brought into the UK will be treated as a remittance of the underlying security.

Where a loan has been provided by an offshore trust or company to enable an individual, trust or partnership to acquire UK residential property then from 6 April 2017 the loan is treated as UK situs, and therefore liable to IHT as a UK asset in the hands of the lender. This could give rise to IHT on the death of the lender, or to 10-year charges where the lender is a trust.

In addition, if overseas assets are pledged as collateral against the loan, the whole of the value of the collateral will be treated as a UK asset, even where this has a greater value than the value of the loan, or the UK residential property being purchased. These provisions apply even if IHT relief for the debt is not available to the borrower.

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