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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:
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.
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.
1. What happens when a UK resident trustee moves abroad?
The test to determine the residency of a trust states:
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:
For interest in possession trusts the trustees pay tax at:
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:
In these circumstances, these complications could be avoided by simply having a new UK resident trustee appointed before all existing trustees change residency.
2. 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:
Francesca Gandolfi
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.
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