What is an excluded property trust? Well it is a UK trust designed for a person who is not currently UK domiciled but who will likely become UK domiciled in the future. This person can transfer overseas assets and property into the excluded property trust to be able to avoid UK inheritance tax (IHT).
The excluded property trust is set up while the person is non-UK domiciled, but the assets (property) in it will remain excluded from UK IHT even if the client’s domicile changes.
It may also be used by those who are not UK domiciled themselves, but may have beneficiaries who are UK domiciled. After the person’s death, any assets that remain in the trust will continue to be excluded property and will not form part of the beneficiaries’ estates for IHT purposes.
Key benefits of the Excluded Property Trust
- Access to the trust investments at any time
- Full control over the investments in the trust
- Opportunity to take tax-efficient withdrawals
- No UK IHT to pay on investments in the trust (assuming these comprise Prudential International bonds)
It is common for offshore bonds, as these are treated as overseas assets, to be transferred into excluded property trusts.
What determines where assets are situated?
These are some of the most common rules.
> Property and assets held within the property are situated where they are located. For example, if you are non-UK domiciled and have a furnished house in Spain, this house and its contents would not be liable to UK inheritance tax on your death.
> 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.
How the trust is set up.
You must not be, or be treated as, UK domiciled when you set up the excluded property trust.
The excluded property trust must not include any UK-based assets.
If you later become UK domiciled, or treated as UK domiciled for inheritance tax purposes, you must not put any further money or assets into the excluded property trust.
The trustees of the excluded property trust
The trustees are the people who will manage the trust and who will have control over the trust fund investments.
The person setting up the excluded property trust will automatically be one of the trustees. If two of you are setting up the trust jointly you will both be trustees.
There should be at least two individual trustees (or a corporate trustee). You can appoint additional trustees in the Trust Declaration form.
After your death, the remaining trustees will have considerable freedom to decide who is to benefit from the trust fund. So it is important to give careful thought to your choice of trustees, so that they will be sufficiently familiar with your wishes to enable them to take them into account when exercising their discretion. The trustees can be based either in or outside the UK.
If you are considering using an excluded property trust get independent financial advice before you act and preferably use a chartered financial planner.