How does an Excluded Property Trust work?

What role does an Excluded Property Trust play in inheritance tax planning?

• An Excluded Property Trust is a trust based inheritance tax planning arrangement for those individuals who are resident in the UK but who are not yet domiciled within the UK.
  
  
• Typically it’s for individuals who wish to purchase an offshore bond and have an Excluded Property Trust wrapped around it.
  
  
• If the individual subsequently becomes domiciled within the UK, the assets inside the Excluded Property Trust can remain outside the scope of inheritance tax.

What is an Excluded Property Trust?

An Excluded Property Trust (EPT) may be suitable for clients who are currently resident in the UK but not yet domiciled here. Domicile is a legal concept and is initially decided at birth, normally as the permanent home of an individual’s father. However, as an adult your domicile may change, for example if you settle permanently or indefinitely in another country. The current HMRC rules state that an individual will be deemed domicile in the UK if they have been resident here for at least 15 of the last 20 tax years. Our domicile status article contains further information.

An individual who is domiciled within the UK is assessed for inheritance tax (IHT) on worldwide assets. The EPT is for currently non domiciled clients who are likely to have assets in excess of the IHT thresholds and who want to mitigate IHT when they eventually become UK domiciled.

How is an EPT structured?

Typically an EPT is a discretionary trust that can be used with new or existing offshore bonds. Top ups (i.e. increments) may be possible before the settlor becomes domiciled within the UK. Settled property situated outside the UK is excluded property if the settlor was domiciled outside the UK "at the time the property became comprised in the settlement" (S48(3)(a) IHTA 1984.

Note that it may also be possible for the trust fund to comprise holdings in Authorised Investment Funds (e.g. OEICs) as these may also constitute excluded property.

How do you set up an EPT?

In the main, if it’s a new offshore bond being placed into a new trust then both the bond application and the trust deed may be dated the same day (or even a few days later). If the individual has an existing offshore bond being placed into trust, then the trust deed will be dated when the last person signs.

What access do settlors and the beneficiaries have to the trust fund?

The settlor has full access to the trust fund. Joint settlors are possible if both are non-UK domiciled. With it being a discretionary trust, there is normally a built in class which consists of settlor, spouse, widow, widower, children, grandchildren and so on. The settlor is also normally the first named trustee. Under a discretionary trust, it is up to the trustees to decide who will benefit and when they will benefit from the trust fund. As long as the beneficiary is in the class of beneficiaries, the trustees can allocate funds to that person. This is why clients should choose their trustees wisely as ultimately they will be dealing with the trust fund after their death. The client may want to lodge a letter of wishes with the trustees to provide guidance, after his/her death, as to how the trust fund might be divided up.

Remember the beneficiaries cannot demand monies from the trustees. The trustees can access the trust fund at any point in time for the benefit of any of the beneficiaries.

What inheritance tax is payable when using an EPT?

None, as the settlor is non UK domiciled when he/she transfers excluded property to the trust. There is no chargeable lifetime transfer (CLT) as the transfer is exempt under the excluded property rules.

The assets of the trust will not form part of the settlor’s estate on death nor the beneficiaries as long as they remain within the trust. The trust fund must continue to hold excluded property.    

Once the client has acquired a domicile of choice within the UK or is deemed domicile by HMRC, they should not top up the bond within the trust or add any further assets to the trust. The settlor must be domiciled outside the UK "at the time the property became comprised in the settlement"

The EPT 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 position from 6 April 2025

In a nutshell, the government has replaced the domicile based system for IHT with a residence based system. This means that  all individuals are impacted by these changes – whether UK or non-UK domiciled under current law. 

The test for whether non-UK assets are in scope for IHT will be whether an individual has been resident in the UK for at least 10 out of the last 20 tax years immediately preceding the tax year in which the chargeable event (including death) arises. The time the individual remains in scope after leaving the UK will be shortened where they have only been resident in the UK for between 10 and 19 years.

Subject to transitional points, the excluded property status of non-UK settled assets will not be fixed at the time the assets are added to a trust. Instead, they will only be excluded property (and so not subject to IHT charges) at times when the settlor is not long-term resident. When a settlor is long-term resident, any assets they have settled (even when not long-term resident) will be subject to IHT. The definition of “long term resident” is therefore very important.

The new regime will therefore bring a number of existing “excluded property” trusts within the scope of UK IHT for the first time.

IHT will be charged on non-UK assets owned outright when a person is long-term resident. IHT will also be charged on non-UK assets in trust at times when the settlor is long-term resident. This means that settled assets come in and out of charge alongside assets owned outright by the settlor and based on long-term residence at the time of the charge, rather than the status being fixed at the time the property became comprised in the trust.

There are transitional rules for non-doms who are non-resident in 2025/26. For those individuals, they will be long-term resident if they satisfy the existing deemed domicile test, namely whether they have been resident for at least 15 out of the 20 tax years immediately preceding the year of charge, and for at least one of the four tax years ending with the relevant tax year. If they return to the UK, the new rules will apply.

There are two different IHT regimes which may apply to trusts within the scope of UK IHT

• The relevant property regime, which imposes IHT charges on every tenth anniversary of the trust’s creation and when property leaves the trust; and
• Gifts with reservation

Essentially, all trusts, including longstanding trusts created before 30 October 2024 and trusts holding no UK assets, will be within the relevant property regime while the settlor meets the criteria for being a long-term UK resident. This applies regardless of whether the settlor can benefit from the trust.

Where excluded property was in a trust immediately before 30 October 2024, this will not be subject to charges under the gift with reservation rules. However, excluded property which was in a trust immediately before 30 October 2024 will be subject to charges under the relevant property regime i.e. the discretionary trust regime (where applicable) from 6 April 2025.

Once in the relevant property regime, the trust will pay a further pro rata “exit” charge when it ceases to be in the relevant property regime (this will happen when the settlor ceases to be a long-term UK resident, which may be many years after they leave the UK).

The Gift With Reservation provisions will not apply to assets placed in trust by non doms before 30 October 2024, except in relation to UK assets. The GWR rules do however apply to any assets added to existing trusts on or after 30 October 2024, or to new trusts created by the settlor on or after this date.

Where the settlor of a trust has died before 6 April 2025, whether non-UK assets are excluded property will be based on the old test, namely the settlor’s domicile at the time the property became comprised in the trust.

Where the settlor of a trust dies on or after 6 April 2025, the excluded property status of the trust will depend on the settlor’s long-term residence status at their death; if they were not long-term resident when they died then non-UK settled assets will be excluded property and if they were long-term resident at death then all UK and non-UK settled assets will be in scope for IHT for the duration of the trust.

For trusts within the relevant property regime, from 6 April 2025 non-UK settled property will no longer be excluded property if the settlor is long-term resident and will be excluded property if the settlor is not long-term resident.