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Our Excluded Property Trust provides a way of protecting offshore bond investments or UK OEICs from Inheritance Tax liabilities if your clients are UK residents but not currently UK domiciled or treated as UK domiciled.
The value of any investment can go down as well as up so your client might get back less than they put in.
The Excluded Property Trust is for clients who are currently not domiciled within the UK or treated as domiciled within the UK, who want to mitigate IHT when they later become UK domiciled. The trust fund will not be subject to IHT providing it holds ‘excluded property’.
The trustees have full control over the investments and are able to make payments to any beneficiary, including your client who is the settlor, at any time.
The trust can also provide IHT protection for beneficiaries, even if they're UK domiciled. The investments will not form part of their estates until distributed to them, so any funds that remain in the trust will not be liable for UK IHT.
More information on what determines where assets are situated can be found in the Guide to the Excluded Property Trust (PDF).
Domicile is a legal concept and is initially decided at birth, normally as the permanent home of your client's father.
As an adult your client's domicile may change, for example if they settle permanently or indefinitely in another country. For UK IHT purposes, long-term residents will be treated as UK domiciled once the deemed domicile provisions apply i.e. they've been a tax resident in the UK for 15 out of the last 20 tax years.
If you think that your client may choose to become UK domiciled in the future, or the deemed domiciled provisions might apply, the Excluded Property Trust could be suitable.
The trust could also be useful if your client's beneficiaries are UK domiciled, even if your client’s domicile does not change. In this case it may help to reduce the IHT liability arising at their deaths.
There are three key rules to follow to ensure that trust investments will be outside the UK IHT provisions.
The trust is set up to run for 125 years. After your client's death, it can be continued, with the assets remaining within it, or it can be wound up by the trustees and the assets distributed to the beneficiaries.
If there is trust property remaining at the end of the trust period, the remaining trust fund will be split in equal shares between your client's children, grandchildren and great grandchildren, who are alive at that time. However, the trustees are free to distribute the trust fund to any beneficiary at any time during the trust period.
If your client and your client's spouse or civil partner are both non-UK domiciled, your client may set up the trust together as joint settlors. Alternatively, they may each set up a trust individually.
The trustees will manage the trust and have control over the trust fund investments. Your client will automatically be one of the trustees. If two of your clients are setting up the trust jointly they will both be trustees. There should be at least two individual trustees (or a corporate trustee) and your client can appoint additional trustees in the Trust Declaration form.
After your client's death, the remaining trustees will have considerable freedom to decide who is to benefit from the trust fund. It's important that your client gives careful consideration to the choice of trustees, so that they'll be sufficiently familiar with your client's wishes.After your client's death, the remaining trustees will have considerable freedom to decide who is to benefit from the trust fund. It's important that your client gives careful consideration to the choice of trustees, so that they'll be sufficiently familiar with your client's wishes.
The Trust Provisions include a standard list of beneficiaries who will be automatically included as people who may benefit from the trust:
Your client may include anyone else they would like to benefit as an additional beneficiary.
The trustees, at their discretion, can make payments from the trust fund to any of the beneficiaries, including your client, at any time. There's no restriction on when or how payments can be made during the trust period, either before or after your client's death.
The investments in the Excluded Property Trust will normally be one of three Prudential International bonds:
The funds for the initial investment should come from a non-UK source (e.g. a non-UK bank account).
The profit made on your client's bond, known as the 'chargeable event gain', is potentially liable for UK Income Tax. This will arise when there is a 'chargeable event', for example:
There's a hierarchy of people who may be liable for any tax charge that arises, starting with your client as the settlor. If the settlor is alive and resident in the UK when a chargeable event occurs, or it occurs in the same tax year in which the settlor dies, the 'chargeable gain' will be taxed on the settlor as if it were part of their income.
If the settlor is not resident in the UK or has died in a previous tax year, the tax charge will be transferred to the trustees to be paid from the trust. Finally, if the trustees are not resident in the UK for Income Tax purposes, the charge will fall on any beneficiaries who are resident in the UK, when they receive money from the trust.
Prudential International is based in Dublin, Ireland and is not liable for any form of tax on the gains on its customers' funds. It also has the advantage of paying no tax on any income it receives within the fund. Overall, its funds suffer less tax than equivalent UK life funds.
This tax advantage is a direct result of Prudential International choosing to be based in Dublin. As your client is investing with Prudential International, the fund the investment goes into is largely tax-free (apart from any irrecoverable withholding tax).
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"Prudential" is a trading name of Prudential Distribution Limited. Prudential Distribution Limited is registered in Scotland. Registered Office at 5 Central Way, Kildean Business Park, Stirling, FK8 1FT. Registered number SC212640. Authorised and regulated by the Financial Conduct Authority. Prudential Distribution Limited is part of the same corporate group as the Prudential Assurance Company Limited. The Prudential Assurance Company Limited and Prudential Distribution Limited are direct/indirect subsidiaries of M&G plc which is a holding company registered in England and Wales with registered number 11444019 and registered office at 10 Fenchurch Avenue, London EC3M 5AG, some of whose subsidiaries are authorised and regulated, as applicable, by the Prudential Regulation Authority and the Financial Conduct Authority. These companies are not affiliated in any manner with Prudential Financial, Inc, a company whose principal place of business is in the United States of America or Prudential plc, an international group incorporated in the United Kingdom.