1. What assets can be put into an Excluded Property Trust?
If you are a UK domiciled individual you are liable to inheritance tax (IHT) on your worldwide assets. However, if you are non UK domiciled, UK IHT only applies to the assets you own that are situated in the UK.
Where you are close to becoming deemed domiciled (deemed domicile is assumed when you have been UK resident for 15 out of the previous 20 tax years) you may want to consider transferring overseas assets to an Excluded Property Trust before becoming deemed UK domiciled.
An Excluded Property Trust (EPT) allows an individual (or couple) to hold non-UK sited investments under trust.
The settlor(s) must not be UK domiciled or deemed domicile for IHT purposes when they create the trust and, under current legislation, this would allow the trust fund to be excluded from the taxable estate of the settlor(s) for IHT purposes on death.
This exclusion applies even if the settlor(s) become UK domiciled or deemed domiciled for IHT purposes after the creation of the trust.
The Canada Life EPT is a discretionary trust which means that the trustees can distribute the trust fund to any beneficiary (whether individually or as members of a class) as they in their complete discretion see fit. The settlor(s) and their spouse/civil partner can also be a beneficiary of this trust; As the settlor is non-UK domicile at the time the gift into trust is made, there is no IHT liability, and provided the property remains within the definition of excluded property, exit charges and periodic changes are not applicable.
Types of excluded property can include:
- The assets of the settlor must be situated outside the UK – they must be ‘non UK situs’ assets.
Property, and assets held within the property, are situated where they are located.
For example, cash is situated wherever it is held. Bank accounts are situated at the bank branch where the account is held. Shares are situated where they are registered.
- An international bond would be suitable and, as it produces no income, trustees would not need to complete a self-assessment return.
For example a non-UK domicile owning a UK residential property, either through an overseas company or trust, or a deemed UK domicile using an excluded property trust, would be subject to the IHT rules on the UK residential property.
2. What happens when a UK resident trustee moves abroad?
The test to determine the residency of a trust states:
- If all the trustees are either UK resident, or non-UK resident, then the residency of the trust will follow the status of the trustees.
- If at any time the trustees are a mixture of UK residents and non-UK residents, then the trust is resident in the UK, only if any settlor was resident or domiciled in the UK at the ‘relevant time’.
The definition of the ‘relevant time’ will depend on the type of trust being considered. If this is a will trust then it is the date of the settlor’s death and if it is a trust set up during the settlor’s lifetime then it is the date when any settlement is made to the trust.
The tax rules for non-resident trusts are very complicated. Although there are general rules that apply to all non-resident trusts, each trust is different and is treated separately.
Trustees of non-resident trusts don’t pay UK tax on foreign income they receive.
For most discretionary or accumulation trusts trustees pay tax at:
- the standard rate on the first £1,000 of taxable income
- 1% on dividend income from stocks and shares
- 45% on UK interest if a beneficiary - or someone who might become one - is resident in the UK
- 45% on all other non-dividend income arising in the UK
For interest in possession trusts the trustees pay tax at:
- the dividend ordinary rate (7.5%) on trust dividend income
- the basic rate (20%) on all other types of income
Non-resident trustees should declare any UK source income due from a non-resident trust.
For IHT purposes, non-resident trusts will be liable for assets situated outside the UK if the settlor was domiciled or deemed domicile in the UK when the assets were put into the trust.
It doesn’t matter if the trustees or beneficiaries are resident in the UK or not, depending on the value of the assets in the trust, IHT may therefore be due when:
- assets are put into the trust
- the trust reaches a ten-year anniversary
- assets are taken out of the trust or the trust ceases
In these circumstances, these complications could be avoided by simply having a new UK resident trustee appointed before all existing trustees change residency.
3. When considering a chargeable gain on an international bond can you explain the effect of a settlor/trustees/ beneficiaries being non-UK resident?
Any potential tax liability is payable in the following order:
- Where a policy is owned by an individual or held in a relevant property trust created by that individual, then that individual is liable to any income tax. If the policy is held under a bare trust the beneficiary is liable to any income tax, as the beneficial owner of the bond, unless the donor is a parent of the beneficiary and the chargeable event occurs while the beneficiary is an unmarried minor.
- If that individual is non-resident or has died in a previous tax year and the policy is held in a relevant property trust created by that individual, then the trustees are liable for the tax if they are UK resident. In this instance the first £1,000 is taxed at the basic rate of income tax and anything over this at 45%.
- If the trustees are all non-UK resident, the beneficiaries of the trust resident in the UK, to the extent that they receive benefit, are liable for the tax.
Francesca Gandolfi has over 20 years experience in the industry, having previously worked as a financial adviser focusing on wealth management, IHT planning, retirement planning, and later life advice.