For UK financial advisers only, not approved for use by retail customers. Click here for the customer website.

Excluded Property Trust

6 min read 26 Nov 20

This is only an example of advice and isn’t based on specific client’s circumstances. Your clients individual needs, circumstances and tax situation will vary.

Alesha has been resident in the UK for 10 years but is currently non UK domiciled. She has a £1m estate which she plans to leave to her nieces and nephews who are UK resident. She is not married or in a civil partnership and does not own a home eligible for Residence Nil Rate Band purposes. She wants an Inheritance Tax (IHT) efficient solution but needs full access to her wealth.

The adviser considers the situation and identifies these important facts about Alesha -

  • Property owned absolutely by a non-UK domicile such as Alesha is outside the scope of IHT if it is located outside the UK. The terminology used is that the overseas property is ‘excluded property’.
  • This IHT treatment also applies to shares held in an Authorised Investment Fund (i.e. OEICs).
  • Alesha will become domiciled in the UK at some point if she remains resident in the UK.
  • If she purchases an overseas investment now and later becomes domiciled within the UK, then it will be subject to IHT if she remains the absolute owner at time of transfer/death.

Given the complexities of domicile, Alesha is advised to take appropriate legal advice before taking any action. Subject to that, her adviser recommends she applies for a £675,000 International (Offshore) Capital Redemption Bond and then completes an Excluded Property Trust (EPT).

Alesha learns that -

  • She must be non-UK domiciled at inception.
  • Once she becomes domiciled within the UK, she should not top up the Bond within the trust or add any further assets to the trust.
  • The trustees must continue to hold excluded property.
  • The EPT is a discretionary trust including herself as a potential beneficiary.
  • Establishing the trust will not create a Chargeable Lifetime Transfer and there will be no exit or ten year anniversary charges.

Alesha gains a better understanding of the concept of domicile, and learns that domicile isn’t specific to tax but instead is one of general law where there are three kinds of domicile. Firstly, Alesha has an overseas domicile of origin acquired, in this case, from her father at birth. Secondly, that can be replaced by a domicile of choice in the UK if she is resident here and intends to permanently reside here. Currently that doesn’t apply in Alesha’s case, but thirdly there are the artificial deemed domicile rules to consider which apply to long term UK residents. Under those rules, she will be deemed to be domiciled in the UK for all tax purposes once she has been UK tax resident for 15 of the last 20 years. Those that are domiciled within the UK are subject to IHT on worldwide assets – though excluded property within an EPT set up by someone who was not domiciled within the UK at inception will remain free of IHT.

Alesha applies for a £675,000 International Capital Redemption Bond with the funds coming from a non-UK bank account. She then completes the discretionary EPT such that the Bond is immediately issued into the trust. This is achieved simply by inserting into the deed the date she applies for the Bond. She is automatically a trustee, and appoints two additional UK resident trustees who are aware of her written wishes for distributing the trust fund in the event of her death. She can change trustees in the future if necessary.

The trust deed includes pre-printed potential beneficiaries but that class does not automatically include nieces and nephews. At outset, the trustees can simply add nieces and nephews to the class providing that Alesha requests or agrees in writing.

During her lifetime, Alesha can access the funds within the EPT as she is a potential beneficiary. Once the funds leave the EPT, they leave the IHT free environment of the trust.

For Inheritance Tax (IHT) purposes, there are no IHT implications for -

  • Gifting into trust
  • Death within seven years
  • 10th Anniversary
  • Capital exiting the trust

With regard to the International Bond, Alesha learns that it will enjoy gross roll-up subject to any irrecoverable withholding tax. There will be no income tax due unless a chargeable event arises and a gain is calculated on that event. The adviser explains that a Capital Redemption Bond has no lives assured meaning that it cannot pay out on the death of the (last) life assured but will instead run until maturity after 99 years. That gives the trustees greater control over the timing of a chargeable event and in practice the Bond will almost certainly be surrendered prior to that date.

For bond tax purposes, Alesha is a UK resident settlor of a discretionary trust with UK trustees. She is taxable if alive and UK resident in the tax year that the gain occurred. If the gain arises in a tax year after her death then the trustees are assessed at trustee rates. Top slicing relief isn’t available to trustees.

After her death, assignments can be made to the nieces and nephews who become taxable if they later encash. It is explained to Alesha that once the beneficiaries are over 18, the trustees can assign segments to them in order that they can subsequently encash with the gain falling on the appropriate beneficiary. Prior to their 18th birthday, segments could be irrevocably appointed on a bare trust for the absolute benefit of a particular beneficiary. Under current income tax rules gains can be offset against any

  • Unused personal allowance
  • Unused £5,000 0% Starting Rate for savings
  • Unused Personal Savings ‘Allowance’

Placing an International Bond into a discretionary EPT where she is a potential beneficiary provides Alesha with a flexible, tax efficient solution. If she dies after becoming domiciled within the UK, the funds outside the trust (currently £325,000) may be sheltered by her Nil Rate Band. The excluded property within the EPT will not be subject to IHT.

Advice Opportunities

Insight from our experts on specific generational needs, as well as the principal life events that drive intergenerational needs, helping you open up new conversations.

Go to page