The ‘What’ of Trusts – Excluded Property Trust
30 August 2017
This is the fourth article in our trust series where we make the trust journey less complex. Last month, Helen O’Hagan, Technical Manager at Prudential covered Discounted Gift Trusts (DGTs) and this time she writes about excluded property trusts.
W – why use an excluded property trust
H – how to use an excluded property trust
A – access for the settlor and beneficiaries
T – taxation of the trust
WHY use an excluded property trust?
An excluded property trust may be suitable for clients who are 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 living here for 17 of the last 20 years. When you are UK domiciled you will be assessed for inheritance tax on your worldwide assets. This trust is for currently non domiciled clients who are likely to have assets in excess of the inheritance tax thresholds and who want to mitigate inheritance tax when they eventually become UK domicile.
HOW do you set up an excluded property trust?
Excluded property trusts can be used with new offshore bonds or existing offshore bonds. Normally they are discretionary trusts which can be topped up at any time.
The dating of trusts can cause confusion but in the main if it’s a new bond you are placing into a new trust you date both the bond application and the trust deed the same day, if you have an existing bond that you are placing into trust you date the trust deed the date of the last person to sign. Note that it may also be possible to transfer into trust, shares in UK OEICs as these will also constitute excluded property.
ACCESS – what access do the settlors and the beneficiaries have to the trust fund?
The settlors have full access to all of the trust fund from day one. As this is a discretionary trust there is normally a built in class which consists of settlor, spouse, widow, widower, children, grandchildren and so on. The settlors are also normally the first named trustees which gives them control of the trust fund. 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 them.
This is why your clients should choose their trustees wisely as ultimately they will be dealing with the trust fund on their death. They may want to lodge a letter of wishes with the trustees to give them some guidance, after their death, as to how they want the trust fund divided up.
Remember the beneficiaries cannot demand monies from the trustees nor does the trust fund form part of their estate for divorce or bankruptcy. The trustees can access the trust fund at any point in time for the benefit of any of the beneficiaries.
TAX – what inheritance tax is payable on an excluded property trust?
None, as the settlor is non UK domiciled when he/she sets the trust up and is placing excluded property within the trust, it is NOT subject to UK inheritance tax. There is no potentially exempt transfer (PET) or chargeable lifetime transfer (CLT) as the transfer is exempt because it’s excluded property.
In the case of an offshore bond, even if the overseas funds are sent to the insurance company who bank in the UK, as long as it is an offshore asset that is being purchased the trust assets will not be subject to UK inheritance tax. The assets of the trust will not form part of the settlors estate on death nor the beneficiaries as long as they remain within the trust.
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.
As you can see, this is a very useful trust for your clients who move to the UK but are not yet domiciled here for IHT purposes. They have the potential to save inheritance tax on any substantial excluded property holdings.
Trusts don’t have to be complex nor convoluted. Our Technical Helpline will be more than happy to answer any questions that you have. You will find more details of the excluded property trust in our Adviser Guide to Estate Planning.
For more technical help by Prudential’s experts visit the PruAdviser website where you can find generic articles and analysis of legislation and consultations.