Excluded Property Settlement

[alphab1]

Hi,

This is a query related to the IHT payable by the estate of a UK domiciled person (owning dual citizenship) who lived in the US for about 20 years and owned various assets there before returning to the UK for permanent residence.

I understand that there is a trust (?) called " Excluded Property Settlement" which allows a person to put his assets in such a 'settlement' while he is still in the US and a non-dom. This will ring fence these assets from the UK IHT, that is, the value of these assets will not be included in the value of the deceased's estate, thus avoiding IHT.

Does anyone on this board know anything about such a 'trust' and whether it is valid or not? I have read articles on various websites about such a device but mostly in connection with marital properties.

Has anyone here have any comments?

Thanks in advance.
alpha

[Parky]

The HMRC Inheritance Tax Manual confirms what you say.

https://www.gov.uk/guidance/inheritance ... -exemption

" Foreign property comprised in a settlement, and not being a reversionary interest, is excluded provided that the settlor was not domiciled in the UK at the time the settlement was made, s.48(3) IHTA 1984."

[PinkDalek]

The HMRC Inheritance Tax Manual confirms what you say.

https://www.gov.uk/guidance/inheritance ... -exemption

" Foreign property comprised in a settlement, and not being a reversionary interest, is excluded provided that the settlor was not domiciled in the UK at the time the settlement was made, s.48(3) IHTA 1984."

Yes but I'm unsure if the OP is talking about Domicile or Residence when saying while he is still in the US and a non-dom.

The the estate of a UK domiciled person and before returning to the UK for permanent residence hinted to me the individual may have been UK Domiciled for IHT purposes all along.

[Parky]

Yes but I'm unsure if the OP is talking about Domicile or Residence when saying while he is still in the US and a non-dom.

Yes, the issue of domicile vs residence is not straightforward.



I also wondered about the possible US taxation of such a trust.

[alphab1]

Thanks for the comments.

The person being discussed here was not born in the UK and became 'deemed domicile' (although this was never discussed with HMRC) as he met Condition B for becoming one.

https://www.gov.uk/guidance/deemed-domi ... april-2017

"From 6 April 2017 new deemed domicile rules came into force.

If you aren’t domiciled in the UK under English common law you’re treated as domiciled in the UK for all tax purposes if either Condition A or Condition B is met.

Condition A is for those born in the UK. The person meets Condition B:

"Condition B

Condition B is met when you’ve been UK resident for at least 15 of the 20 tax years immediately before the relevant tax year."

About losing deemed domicile status the document says:

Losing deemed domicile status

You can lose deemed domiciled status under Condition B, if you leave the UK and there are at least 6 tax years as a non UK resident in the 20 tax years before the relevant tax year.

There are in fact 19 tax years as a non UK resident since 2001.

I am not sure about how this trust will be treated by IRS. When a US person's assets are put in a Revocable Living Trust to protect them from a probate process no taxes become payable. IHT becomes payable by the Trust only when the grantor dies provided the value of the estate exceeds $11.4 million (2018) whereas the comparable figure for UK IHT is £325,000 ($425,000).

Clearly, there is sufficient incentive to use such a protection plan even if at the end (when the owner of the assets dies) HMRC rules that the exclusion settlement is not valid because the person was in fact a UK domicile when the new exclusion Trust was created - only the cost of creating such a trust is lost.

It would be useful to know if the above arguments have some flaw.

Cheers.

[Parky]

Thanks for the comments.

..….It would be useful to know if the above arguments have some flaw.

Cheers.

For that I think you need professional advice from an international tax lawyer.

[PinkDalek]

Can you confirm Domicile of Origin is not applicable (albeit the individual was not born in the UK)?

https://www.gov.uk/hmrc-internal-manual ... /rdrm22100

Deemed Domicile

"Condition B

Condition B is met when you’ve been UK resident for at least 15 of the 20 tax years immediately before the relevant tax year."

Can you explain why deemed domicile is applicable as you then say There are in fact 19 [?] tax years as a non UK resident since 2001.

When did the individual return to the UK (or is this yet to happen)?

[alphab1]

Lived in the UK from 1981 to 2001, except for 2 yrs when he worked outside the UK. This gives him the deemed UK domicile status as he was 'resident for at least 15 of the 20 tax years'.

Moved to the US in 2001 and planning to return in 2020. So, 19 yrs of absence would give him non-dom status as he lost his 'deemed domicile status' when he spent more than '6 tax years as a non UK resident in the 20 tax years'.

Yes, I have to find a good lawyer either in the UK or USA.

Cheers.