This article is around something called an Excluded property trust. It is very useful for saving all types of tax – income tax, IHT, CGT, for people in a couple of different scenarios. For instance, if you are not yet domicile in the UK and you may become deemed domiciled because you intend to live here long term.

In many cases, it’s useful for people who have settled in the UK and have become domiciled but their parents may be non-domicile with lots of assets offshore which they are going to leave to their UK beneficiaries.

An Excluded Property Trust could save tax for both of those types of people.

Setting up an Excluded Property Trust can be highly beneficial for people who are currently classified as UK non-domiciles and who hold significant offshore assets. The rules for an Excluded property trust are different than they are for UK trusts because they are offshore trusts set up in offshore jurisdictions. It will cost a few thousand pounds to set up and at least £1,000 a year to run and maintain to pay the costs of the offshore trustees.

They can be set up in different offshore jurisdictions – we work with a number of different countries including the Channel Islands, The Isle of Man, The Cayman Islands and Cyprus. We will explain to you the different jurisdictions and the different costs involved in setting up these arrangements.

Why set up an excluded property trust?

It really can save a huge amount in different taxes including income tax, capital gains tax and inheritance tax for people with two main scenarios.

First – people who are likely to become UK deemed domicile.

These are people who have lived or are going to live more than 15 out of the last 20 years in the UK or intend or intend to permanently settle here even if they weren’t born here in the first place.

Second - The second type of people are people who are currently non-domicile, don’t live in the UK, not even resident of the UK but they intend to leave significant offshore assets to children or grandchildren who are already UK-domiciled or will become UK domiciled.

As the first scenario concerns people who are going to become UK-domiciled, you must understand that these Excluded property trusts only refer to offshore assets – they have nothing to do with any UK assets. They also must be done before you become UK-domiciled.

Once the Excluded property trust is set up, it’s possible to borrow the assets from your own trust, even though you put the money in it in the first place. If you borrow the money from the trust, it’s not considered as income from an offshore asset and it’s not a subject to UK income taxes. On death, the debt is payable back to the Excluded property trust which then reduces your asset base for UK inheritance tax even though you may have already become UK-domiciled by the time you die.

If you want to manage your assets offshore, you can have an investment portfolio, or a property portfolio offshore owned by that Excluded Property Trust. Any income into that trust is then borrowed by you – not subject to taxes and doesn’t even have to be declared because it has nothing to do with HMRC since the assets are owned by an offshore trust subject to an offshore jurisdiction.

However, if you bring money in the UK form that offshore trust as income and you invested it in the UK, that will be subject to UK taxes, but if you just borrow the money and spend it on your lifestyle, it’s not subject to any UK taxes.

If any money taken out is considered borrowed, then no income tax is payable, but you have to pay interest back to your Excluded property trust to make it an arm’s length transaction.

The second scenario concerns people who are not UK-domiciled but they intend to leave assets to their children or grandchildren who are resident in the UK and are going to be domiciled in the UK.

If the assets are left directly to UK-domiciles, they will be subject to UK income tax and UK inheritance tax. Another downside is that if your beneficiaries get divorced, there’s no protection for the assets.

You can set up and put assets in an Excluded property trusts during lifetime. Because there are ongoing fees of at least £1,000 payable to the offshore trustees it makes sense to put assets into the trust during lifetime. If you intend to gift money to your children who are based in the UK, you can gift the money into the Excluded property trust where they can borrow it from.

On death, your Wills can pass the assets to the Excluded property trust as opposed to directly to your UK resident beneficiaries. Those beneficiaries can then borrow the money from the trust thus avoiding being subject to UK income and inheritance taxes.

The money can be managed offshore too which makes it exempt from UK capital gains tax and income tax on the trust itself.

This is a very useful tax saving strategy for people in the aforementioned scenarios but does require experienced help and advice.

Call us if you need help.