Excluded Property Trust

Hi, anyone seen proposed changes to IHT Act 84 and section on Excluded Property Trusts?

We have a client who was UK born, lived abroad and adopted Swiss Domicile.  Whilst there opened an Excluded Property Trust (advised by a Swiss adviser).  Has since returned to UK and now UK res and Domicile.

HMRC proposals are saying:

The second aspect of the reforms to restrict access to non-dom status are the proposals which will affect those individuals who were born in the UK with a UK domicile of origin but who have acquired a domicile of choice elsewhere. The government does not believe that those individuals who were born in the UK with a UK domicile of origin should be able to benefit from the non-dom regime while they are resident in the UK. Legislation will be introduced so that from April 2017, an individual in this position will be treated as having a UK domicile of origin for tax purposes while they are resident in the UK.

The intention is that if the individual returns to the UK, they will be taxed as a UK domicile while they are resident here for tax purposes. The individual will continue to be treated as not domiciled in the UK while they are not UK resident.

This group of individuals will be treated as having a UK domicile for tax purposes. This means there will be no protection for offshore trusts, either in terms of the tax on income/gains in the trusts or for IHT purposes. The excluded property trust rules for IHT will be changed so that they do not apply in these circumstances. This will be the case even for trusts that are set up offshore while the individual was not domiciled or resident in the UK (and would therefore be excluded property for IHT purposes under the current rules). So if an individual caught by this test acquires an overseas domicile and then sets up an offshore trust while non-UK domiciled, once that individual becomes UK resident the assets in that trust will cease to qualify as excluded property and would be liable to inheritance tax charges.”

If these proposal come to fruition I think he is up the river without the necessary and his £1.6M trust assets are IHT-able (alongside a whopping chargeable gain if he surrenders the offshore bonds).

Any ideas thoughts.  EIS away some of the chargeable gain, perhaps some BPR too to get stuff outside estate ASAP.  DGT / Flexible Trust the rest and hope he survives 7 years...?


  • STEP raised this in August 2015 (as this was part of the 2015 summer budget). In the STEP briefing it talks of the situation being where the underlying asset was UK based but was wrapped around an offshore excluded property trust by a non dom to avoid UK IHT.

    I'm not sure that an offshore trust with an offshore asset created with non uk wealth and not legally owned by the client is caught by what HMRC are trying to do.

    Might be worth discussing with Pru or Royal London 360 as both have excluded property trusts.

    (Just another thought; what was domicile of your client's father? Then, depending on circumstances client may never have been UK domiciled in the first place.)

    Would be interested to learn what Pru / RL360 say though.
  • Thanks Richard, interesting thoughts.  The Pru have provided the below in which I can see no distinction between onshore and offshore assets.

    Is the telling part their final paragraph?  Non-dom returning to the UK treated the same as UK Dom under general law - i.e. IHT payable on worldwide assets?

    I'll carry on digging.

    The explanatory notes to the draft finance bill clauses include the following…

     Clause 41

    This clause amends the inheritance tax (IHT) legislation relating to individuals who will be treated as domiciled in the United Kingdom….The clause also introduces a separate rule to provide that an individual born in the UK with a UK domicile of origin who has acquired a domicile of choice elsewhere will be treated as domiciled for IHT purposes if at any time they are resident in the UK and have been resident in the UK in at least one out of the two previous tax years.

     The changes will take effect from the start of the 17-18 tax year on 6 April 2017.

     Subsection 4 makes amendments to section 48(3) of the Inheritance Tax Act (1984). New section 48(3E) provides that any foreign assets settled into trust by a formerly domiciled resident while they were domiciled outside the UK will, no longer be treated as excluded property for a tax year in which the formerly domiciled resident is resident in the UK.

     Subsection 8(b) defines the term "formerly domiciled resident". This means an individual who was born in the UK, with a UK domicile of origin and who was resident in the UK for the tax year and at least one of the two immediately preceding tax years.

     Subsection 9 contains the commencement provision and provides that the amendments will take effect in relation to times after 5 April 2017 subject to subsections (10) to (12)

     The new rules will also ensure that individuals who are born in the UK, with a UK domicile of origin at birth and who reside in the UK are treated for tax purposes in the same way as an individual domiciled in the UK under general law. It also means that when an individual who was born in the UK and who had a UK domicile of origin has created a trust whilst they were non domiciled, that trust will be subject to IHT, whilst they are UK resident, in the same way as a trust which had been created by somebody who was domiciled in the UK.

  • Hi Jona,
    The Clause 41 notes are telling and would lead me to conclude that your client is fully caught by this change - another 'retroactive' piece of tax legislation - and so liable on worldwide assets.

    One can see the logic of the proposed change but would seem to be fairer if it applied to trusts set up on our after budget day rather than ones created many years ago. IHT has always been seen as a hidden 'stealth' tax as it is not the asset owner who pays the tax!

    I agree your consequential planning options are difficult and whichever way you go creates a different set of problems. What you suggest in your original posting seems a sensible way of approaching this. Is client able to make pension contributions?
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