Excluded Property Trusts

The settlor is the individual who provides the funds for the trust. The trustees are the individuals who administer the trust. The beneficiaries are the people who will ultimately benefit from the trust. The possible beneficiaries include the settlor, the settlor’s spouse or civil partner, children, grandchildren and remoter descendants, brothers and sisters, and any individual or charity named by the settlor as a beneficiary.

The settlor has full access to the trust fund. With it being a discretionary trust, it is up to the trustees to decide which beneficiaries will benefit (from the designated class of beneficiaries nominated) and when they will benefit from the trust fund.

Hence, clients should choose their trustees wisely as they will be dealing with the trust fund after their death. The client will want to lodge a letter of wishes with the trustees to provide guidance, after his/her death.

The beneficiaries cannot demand monies from the trustees. The trustees can access the trust fund at any point in time for the benefit of any of the beneficiaries and the domicile status of the beneficiaries is irrelevant.

IHT is generally charged on the worldwide assets of individuals domiciled in the UK and in respect of the UK assets of those individuals domiciled elsewhere. It should be remembered that domicile for IHT purposes includes ‘deemed domicile’.

For the purposes of IHT, individuals who are not already UK domiciled as a matter of law can be treated as being UK domiciled (‘deemed domiciled’) if they are:

• resident in the UK for at least 15 of the previous 20 tax years immediately preceding the relevant tax year, and

• resident in the UK for at least 1 of the 4 tax years ending with the relevant tax year.

In addition, if they return to the UK to become UK resident, having been born in the UK, had a UK domicile of origin, but later emigrated and acquired a foreign domicile, and they were UK resident for at least one of the two previous tax years, they would be deemed domiciled for IHT and known as a Formerly Domiciled Resident (FDR).

None, as the settlor is non-UK domiciled when he/she transfers excluded property to the trust. There is no chargeable lifetime transfer (CLT) as the transfer is exempt under the excluded property rules. The assets of the trust do not form part of the settlor’s estate on death nor the beneficiaries as long as they remain within the trust. However, the trust fund must continue to hold excluded property.

Once the client has acquired a domicile of choice within the UK or is deemed domicile by HMRC, they should not add additional monies to the trust or add any further assets to the trust. The settlor must be domiciled outside the UK "at the time the property became comprised in the settlement"

Trust property is excluded property if the settlor was not UK domiciled at the time the settlement was established and the property is situated outside the UK. A trust meeting these conditions is known as an ‘Excluded Property Trust’.

If the settlor’s domicile later changes (for example, they become deemed domiciled in the UK) the trust assets remain excluded property (unless the settlor is a FDR).

In essence, if it’s an offshore bond being placed into a new trust then both the bond application and the trust deed may be dated the same day (or even a few days later). If the individual has an existing offshore bond being placed into trust, then the trust deed will be dated when the last person signs.

One of the main conditions is that the trust asset must not be UK property. Isle of Man assets issued by an Isle of Man resident company are typically seen in EPTs. In a suitable trust it meets the test of being “situated outside the UK”.

Furthermore, if the plan is already setup, it can be assigned without a capital gains tax charge, making it particularly suitable for use in trust arrangements.

• The settlor’s gift is a not a transfer of value for UK IHT purposes.

• The reservation of benefit rules do not apply to the Excluded Property Trust.

• The settlor will not be within the scope of pre-owned asset tax in relation to the trust fund.

UK domiciled spouses or civil partners transferring assets between themselves, and non-UK domiciled individuals transferring assets to a spouse or civil partner, can transfer any value of assets free of Inheritance Tax (IHT).

However, where the donor is UK domiciled and the recipient spouse or civil partner is non-UK domiciled, the spouse exemption is capped at the amount of the nil rate band (currently £325,000) and any gifts in excess of this amount may be subject to IHT.

Non-UK domiciled individuals who have a UK domiciled spouse or civil partner can elect to the HMRC, in writing, to be treated as domiciled in the UK for IHT purposes only (i.e. not for other taxes such as income tax or capital gains tax). This enables assets to be transferred between spouses or civil partners free of IHT, but means that the worldwide estate of the individual who makes the election is within the scope of IHT.

Elections can be made by the non-UK domiciled individual either during the lifetime of the UK domiciled individual (a ‘lifetime election’) or following his or her death (a ‘death election’). In either case the election can be backdated to apply from an earlier date and so any gifts which were made from the date specified in the election should benefit from the uncapped spouse exemption available to UK domiciled couples.

For backdated elections, the earliest date it can apply from is the later of (i) the date of marriage or registration of civil partnership or (ii) up to seven years before the date the election is made (in the case of a lifetime election) or up to seven years before the date of death of the UK domiciled individual (in the case of a death election). Lifetime elections can be made anytime, but a death election must be made within 2 years of the date of death. Elections are irrevocable. However, they cease to have effect if the electing person is non-UK resident for income tax purposes for more than four full consecutive tax years. The election will cease to have effect from the end of the four-year period.

Care should be taken when backdating an election, as the non-UK domiciled individual would be treated as UK domiciled for all IHT purposes from the date specified in the election, meaning that gifts by the individual which would previously not have been subject to IHT may become chargeable.

• The UK domiciled individual can give any value of assets to their non-UK domiciled spouse or civil partner IHT-free.

• The worldwide assets of the non-UK domiciled individual will be within the scope of IHT, although the nil rate band and any other relevant reliefs or exemptions will be available.

• The income tax and capital gains tax position of the non-UK domiciled individual who makes the election will be unaffected, and the remittance basis of taxation will continue to be available where relevant.

• The UK domiciled individual can give or leave assets worth up to the amount of the capped spouse exemption (£325,000 until 6 April 2028) to their non-UK domiciled spouse or civil partner free of IHT.

• If the individual dies within seven years of making lifetime gifts and/or leaves assets to their spouse or civil partner on death, IHT will be payable to the extent the value of the gifts and bequests exceeds the available spouse exemption, unless the nil rate band and/or other IHT reliefs or exemptions are available. It should be borne in mind that the spouse exemption may not be available on amounts chargeable on death if it has been offset against lifetime gifts that never became chargeable.

• Non-UK assets owned by the non-UK domiciled spouse or civil partner will be outside the scope of IHT.

• Non-UK domiciled spouses or civil partners who hold UK situated assets will still be liable to IHT on their UK assets.