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In the tenth of a series of extracts adapted from his eBook 'Hutton on Estate Planning' (3rd Edition), Matthew Hutton looks at Inheritance Tax (IHT) mitigation issues for non-UK domiciliaries.

Excluded Property: the IHT Exemption for Non-UK Domiciliaries

Where the deceased was domiciled or deemed domiciled in the UK at death, the estate will be liable to IHT regardless of where the assets were situated. If he was not so domiciled, IHT will apply only to assets situated in the UK. The normal domicile rule is extended in two circumstances (IHTA 1984 s 267).

IHT Mitigation for Non-UK Domiciliaries

Any assets which do not need to be situated in the UK from time to time (e.g., cash surplus to immediate spending requirements, investment portfolios, etc.) should be kept outside the UK. But it is more difficult with a house or flat and furniture: what can be done there? 

Non-UK Domiciled Settlors and Excluded Property Settlements - But Beware the Possible Traps

With settled property, the trust assets will be "excluded property" if situated outside the UK and if the settlor was domiciled outside the UK when the settlement was made (IHTA 1984 s 48(3)). This applies regardless of a subsequent change of domicile by the settlor or indeed changes in the trust property, provided that the property remains outside the UK. HMRC Trusts and Estates have traditionally accepted, and have recently confirmed, that the GWR rules are ‘out-flanked’ by the excluded property rules. It matters not where the trustees are resident.

This is the rule even if the settlor has an initial 'estate' interest in possession and dies UK domiciled with that interest and if his children, also UK domiciled, have successive life interests.

That said, there are two traps. First, where (in any case) property ceases to be subject to a reservation, the donor is treated as making a PET (FA 1986 s 102(4)). That is, if the trustees exclude the settlor from benefit and he dies within seven years, he will be treated as having made a chargeable transfer, even if the property in the settlement is excluded property.

The second trap applies in a case where the settlement grants initial estate interests in possession to the settlor and/or spouse/civil partner and, at the time when the interest of the last of them to have such an interest ends (typically on the second death), that beneficiary is actually or deemed UK domiciled, but the settlement continues, generally on or after 6 October 2008. Regardless of whether there is a continuing ‘estate’ interest in possession (as a transitional serial interest) or the relevant property regime applies, the UK domicile of the deemed settlor will mean that the erstwhile protection of excluded property settlement status is no longer available, even if the trust fund is situated outside the UK (under IHTA 1984 s 80).

The above is an adapted extract from Hutton on Estate Planning 3rd Edition.

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