What exactly is an excluded property trust?
It is a trust set up by people who are not domiciled in the UK – in other words, they live abroad, they were born abroad, their parents were born abroad and they also have significant assets offshore.
The other people it applies to are people, who are looking to come to live in the UK or who were not born in the UK but have been residents in the UK for less than 15out of 20 years. After 15 out of 20 years, a person is deemed domiciled and their worldwide assets are liable to UK inheritance tax.
If you have been here less than 15 years and you weren’t born in the UK, it’s worth considering this for assets that are not in the UK.
What are the main uses of this particular kind of trust?
It’s for parents, whose children are going to be domiciled because they are resident in the UK, even before the assets are left to the children. If parents leave assets directly to their children, the adult children will be liable for UK inheritance tax because the assets will be a part of their estate and there will be no protection mechanisms in place. The assets will also be liable for all UK taxes.
However, if an offshore person leaves assets to their UK-resident children using an Excluded Property Trust, those assets will not be liable to any UK taxes. If the assets are left to a UK trust, it’s then potentially liable to the 10-yearperiodic charges that arise on the value which exceeds Nil Rate Band at the time. An Excluded Property Trust doesn’t even have that limitation.
If assets are assigned to an Excluded Property trust via a will, the assets are effectively outside of the UK jurisdiction. Then, their UK-resident children can borrow the capital and the income out of those trusts and not be liable to UK taxes, because it is considered borrowing of the assets which belong to the offshore trust.
During lifetime, borrowing the capital protects the assets against divorce – in the event of divorce, the trustees will reclaim the capital back into the trust and the day after the divorce is settled it can be paid out again to the children.
The assets could also be invested offshore and left to grow thus not being liable to UK taxes. The children can borrow income streams from those offshore assets with no tax liabilities.
Death of the settlor
On death, all the money, borrowed by the UK-resident children, is repaid to the Excluded Property Trust thus avoiding inheritance tax arising for grandchildren. Some one could borrow several hundred thousand pounds during their lifetime, on death the entire borrowing is paid back to the Excluded Property trust and the grandchildren of the original settlers of the trust are not liable to UK inheritance tax.
People who will become UK domiciled
An excluded Property trust is also highly relevant for people who are going to become domiciled in the UK. If you were living abroad, weren’t born in the UK and are now coming to live in the UK from now on, you should place your assets into an Excluded Property Trust before you have been in the UK for 15 years.
In the case of married couples, where one of them is non-dom, they could transfer assets from one spouse to another and then put it into an Excluded Property Trust and get all the benefits. In this case, the assets can even be borrowed by the settlers during their lifetime, which is not possible in a UK trust. Any growth on the borrowed capital will be in the settlers’ estate, but the capital itself will be outside of the estate.
Capital is repayable by the people borrowing the money and the inheritance tax will not arise because the capital is not a part of the estate.
For non-domiciles with significant assets held offshore, an Excluded Property Trust should definitely be considered as part of their financial planning because of the huge tax savings and the capital protection provided.
This is a very complex area of planning and advice should be taken from an experienced practioner.