Draft legislation in Finance Bill 2019-20 includes changes which could result in higher inheritance tax charges for some excluded property trusts from the date of Royal Assent onwards.
Under current legislation, non-UK assets within a trust qualify as ‘excluded property’, meaning that they are outside the scope of UK IHT, where the settlor was neither UK domiciled nor deemed domiciled (by virtue of being a long-term UK resident) at the time the settlement was made.
Where non-UK assets are transferred between trusts, these will only be treated as excluded property in the second trust if the settlor of the second trust was neither UK domiciled nor deemed domiciled (as a long-term UK resident) when the settlement was made.
The 2017 Court of Appeal decision in Barclays Wealth Trustees (Jersey) Limited & Michael Dreelan v HMRC confirmed in relation to transfers between trusts that the ‘time the settlement was made’ refers to the initial creation of the settlement, not the date of the transfer. Therefore, excluded assets transferred between trusts created while the settlor was non-UK domiciled should retain their excluded property status.
A logical extension of this principle might suggest that when determining the excluded property status of later additions to an existing excluded property trust, only the domicile status of the settlor at the time the trust was created is relevant. However, the court did not specifically rule on this point.
Draft Finance Bill 2019-20 clarifies that non-UK assets cannot be excluded property where the settlor was actually UK domiciled or deemed domiciled (as a long-term UK resident) at the time the assets were added to the trust (this is opposed to considering the domicile of the settlor at the time the settlement was first created).
In addition, it is proposed that non-UK assets transferred between trusts will not be treated as excluded property where the settlor was UK domiciled or deemed domiciled (as a long-term UK resident) when the transfer occurs.
The draft legislation was published on 11 July 2019 and was open for consultation until 5 September 2019. It was proposed that the legislation would apply to all chargeable events, being IHT ten year charges and exit charges, from the date of Royal Assent onwards. It is intended that this will be the case regardless of whether trust additions were made before or after the date of Royal Assent. The proposals for transfers between trusts are only intended to apply to transfers which take place on or after the date of Royal Assent, so do not have a retrospective effect.
Ravi settled two offshore trusts, the first in 1995 and the second in 1998, when he was neither resident nor domiciled in the UK. He moved to the UK in 2001 and became deemed UK domiciled from 6 April 2017 as he had been UK resident in at least 15 of the previous 20 tax years. In 2021, the 1998 trust received a transfer of non-UK assets from the 1995 trust.
The next ten year anniversary of the 1998 trust will occur in 2028. Under the proposed new legislation, the funds added in 2021 will not be excluded property at this date as the transfer was made when Ravi was deemed UK domiciled. These funds will therefore be subject to a ten yearly IHT charge at a maximum rate of 6%. In addition, if any of the transferred funds leave the trust, they may be subject to an IHT exit charge. Relief would be available to reflect the fact that the property added in 2021 has not been held in the trust for the full 10 years.
The transfer of assets from another trust with the same settlor will also have ‘tainted’ the trust from an income tax and capital gains tax perspective, which could result in higher income tax and capital gains tax charges in the UK.
Had Ravi left the excluded property in the original trust, it could have continued to benefit from IHT protection as it was settled before he became deemed UK domiciled as a long-term resident. The trust would also have retained its protection for income tax and capital gains tax purposes, provided it had not been tainted in any other way.
Individuals considering settling non-UK assets into trust and offshore trustees should take advice to ensure that they preserve the excluded property status of assets currently held in trust and do not inadvertently fall foul of the new rules.
Offshore trustees should also notify affected clients of the changes.
Wilkins Kennedy have substantial experience in working with non-domiciled individuals and offshore trustees and can assist with matters such as the following:
Should you wish to enquire further into these areas please get in touch with your normal Wilkins Kennedy contact or a member of our tax team.
Authored by Naomi Wells, Wilkins Kennedy Tax Manager, London office
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