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UK residential property continues to generate strong interest amongst foreign investors, especially from Asia. London, specifically, has always been attractive, and it consistently remains one of the top three cities in the world in which to buy prime property.

Asian investors continue to drive this trend, being particularly attracted to the flexibility and potential returns, through either appreciation or income, that diversification through this asset class offers. The trend continued to accelerate through the Covid period and there are no signs of this slowing, as wealth across the whole Asia region grows. However, buying a UK residential property requires a sound estate and succession planning in order to be able to meet future tax liabilities. Here are the key elements to bear in mind for Asian investors.

The latent cost of UK property investment

Many of these foreign investors and their advisors fail to realise that by acquiring or continuing to hold UK residential property (either directly or indirectly via trusts or offshore companies), they also acquire a latent 40% UK inheritance tax (IHT) liability. IHT is levied on the net value of the property upon death, the residence of the owner or beneficiaries does not stop this tax from being due - awareness on this point is critical for clients who live in countries such as China or Malaysia where estate taxes do not exist and are therefore a largely unknown concept.

The importance of liquidity planning

Estate and succession planning to ensure there is adequate liquidity to meet IHT demands is therefore essential. Having no appropriate plan to address liquidity needs is likely to result in an unwelcome burden for beneficiaries, which may force a fire sale of the property itself or sale of bankable assets at an inopportune moment to pay the taxes due.

Take for example a GBP 10 million house in Central London – this would require the property owner to ring-fence significant amounts of otherwise investable capital for a property bought many years ago, that has steadily appreciated in value and now threatens a IHT bill of approximately GBP 4 million. The result of a latent IHT liability has the potential to cause unexpected and very large liquidity issues for future beneficiaries.

The International Life Plan

The International Life Plan, specifically designed for non-UK residents with assets in the UK, uses traditional life insurance to provide pure protection to investors who wish to have the ability to protect key parts of their financial legacy and efficiently manage their estate planning.

Simply put, this solution provides for a fixed, defined coverage in GBP, matching the liability in sterling and removing any FX risk. It covers international lives assured, on a single or joint life 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.