Exit charges - non long-term resident trust

Trusts Discussion
1

I have a query that I believe I know the answer to but it seems to be illogical and I would welcome input, particularly if I have missed something.

Scenario - trust set up by deemed dom settlor who became non-resident before 24/25 and ceased to be a long-term resident from 6 April 2025. Trust held solely UK situs assets so no exit charge on 6 April 2025. Trustees are considering divesting of UK assets and acquiring non-UK situs assets and appointing said non-UK situs assets out of the trust before the first 10-year anniversary in 2029. I believe there is no exit charge at all in this circumstance as all assets are excluded property.

S65(7) IHTA 1984 as amended by Finance Act 2025 still states that there is no exit charge on property becoming excluded property (because it ceases to be situated in the UK and the settlor is not long-term resident). Therefore, no exit charge arises on the conversion from UK to non-UK. Subsequently, as the property being appointed out of the trust is excluded property, there is no exit charge when it is appointed from the trust to the beneficiary.

Compare this to a settlor of a trust in the same situation except that trust happened to already own the non-UK property as at 6 April 2025. There would have been an exit charge at that point.under s65(1). No exclusion under s65(7) as the property didn’t “cease to be situated in the UK” - it always was foreign property. Why should this scenario suffer a charge when the earlier scenario does not?

Taking it to the extremes, a client could have switched to UK situs assets as at 6 April 2025 to avoid the exit charge and then reinvested into non-UK assets a week later to avoid the charge.

Am I missing something?

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2

If property in an RPT was excluded property on 5 April 2025 under the old rules and remains excluded property under the new rules on and from 6 April why would there be a charge?

Jack Harper

3

It wasn’t excluded property under the old rules. He was a deemed dom settlor and it held UK property.

4

I was responding to your posited alternative scenario not your analysis of your client’s own situation. His trust may or may not have been old rules excluded property when it was first settled but as all the settled property was UK situs it was not such on 5 April 2025, whether he was then deemed domiciled, common law domiciled or not domiciled.

It did not become excluded property on 6 April because it was still UK situs. So if it becomes excluded property thereafter there will be an exit charge as per s65(1) because it does not become excluded property per s.65(7) because of s.48ZA but because of a change of situs in the trust assets. It does not matter that at the change he is not a long-term resident.

This is not surprising. UK situs assets were chargeable if held on a trust made by a non-domiciled settlor and are now even if the settlor is not a long-term resident.

Jack Harper

5

My take on s65(7) seems to be completely the opposite of yours, which I must admit is what is causing me to doubt my understanding - hence the post. The original 65(7) was always there to stop an exit charge when a trust set up by a non-dom came out of UK situated property and into foreign property, that was excluded property because of the person’s non-domicile status. In other words it could move out of charge to UK IHT without an exit charge. The wording has since been changed to apply the same rules, except this time the relevant definition to ensure it is excluded property, is that the settlor is not a long-term resident. The actual legislation states:

65(7) Tax shall not be charged under this section by reason only that property comprised in a settlement ceases to be situated in the United Kingdom and thereby becomes excluded property by virtue of section 48ZA above.

48ZA(1) If property comprised in a settlement–

(a)is situated outside the United Kingdom, or

(b)is a holding in an authorised unit trust or a share in an open-ended investment company,

this section applies to the property and section 6(1) and (1A) (general excluded property rule) does not.

48ZA(2) If the settlor is alive, the property is excluded property at any time when the settlor is not a long-term UK resident.

You wrote:

So if it becomes excluded property thereafter there will be an exit charge as per s65(1) because it does not become excluded property per s.65(7) because of s.48ZA but because of a change of situs in the trust assets.

This is not surprising. UK situs assets were chargeable if held on a trust made by a non-domiciled settlor and are now even if the settlor is not a long-term resident.

I think that you are saying (in your last sentence) that because the trust is in the relevant property regime (because they were UK situs assets) there must be an exit charge to come out. My understanding of s65(7) is not that it has to become excluded property because of s48ZA but it is because it ceases to be an asset situated in the UK (i.e. reinvestment into foreign assets) AND that is is excluded property because the settlor is not long-term resident (in my case he ceased to be long tern resident five months prior). This test is satisfied so why should there be an exit charge?

The difference being s65(7) seems to allow a get-out for investing in non-UK situate assets once the settlor is not long-term resident, and s65(1) charges those already held foreign assets assets (because they do not ‘cease to be situated in the UK’ as per 65(7)) that drop out of charge because they no longer fall into the relevant property regime.

It doesn’t seem fair but I can’t get round to your understanding of the reading.

6

The assets in the trust according to your post were UK property not foreign property before the change in the law and after it. S65(7) is plainly inapplicable because, as I understand the position, it did not cease to be situated in the UK and indeed still is until the trustees decide to change its locality to foreign.

Nor does s.48ZA apply to it because it simply is not, even now, “situated outside the United Kingdom”.

The point of these provisions was to preserve the status of excluded property after 5 April 2025 where the settlor changed his status on that date to long-term resident. Under the new law in s.48ZA the foreign property of a long term resident is NO LONGER excluded property. S. 65(7) is a saving derogation from that: where the settlor is alive the FOREIGN property in his RPT is regarded as still being such despite the change in his personal status.

You do not say whether your client’s status changed or not on 6 April 2025 but it does not matter. Neither provision applies to UK situs property which is and always has been in charge to IHT regardless of the status of the settlor. Even if he was non-domiciled and is not a long-term resident the UK assets of his trust were and are UK property not foreign property and so not at any time excluded property.

Jack Harper

7

Jack

I know UK property is always in the charge to UK IHT regardless of domiciled, long-term resident status etc. Always has, and likely always will be.

I don’t know whether we are talking at cross purposes as you keep referring to UK property. I thought I had made it clear that they will come out of UK property and move into foreign property. I also thought I made the tax position of my client clear in my original post.

My question was about selling those UK investments and investing in foreign investments at a time when he is not a long-term resident and my view is that there is no exit charge on doing that. I did also state that his status changed on 6 April 2025 as he ceased to be long-term resident.

Part of original post:

Trustees are considering divesting of UK assets and acquiring non-UK situs assets and appointing said non-UK situs assets out of the trust before the first 10-year anniversary in 2029. I believe there is no exit charge at all in this circumstance as all assets are excluded property.

I still don’t understand why s65(7) does not apply to exempt the exit charge because:

  • the assets cease to be situated in the UK
  • the settlor is not a long-term resident

You say

The point of these provisions was to preserve the status of excluded property after 5 April 2025 where the settlor changed his status on that date to long-term resident. I don’t know what you mean here. There is no grandfathering of excluded property. Even if the property is foreign, it falls into the relevant property regime after 5 April 2025 if the settlor was long-term resident. You have even written this in the next sentence so what does your first sentence mean about preserving status of excluded property?

You also state:

Under the new law in s.48ZA the foreign property of a long term resident is NO LONGER excluded property. Agreed S. 65(7) is a saving derogation from that: where the settlor is alive the FOREIGN property in his RPT is regarded as still being such (such, meaning excluded property??) despite the change in his personal status. What to long-term resident? I really don’t know what you are saying here.

I am not going to comment further as there is clearly some miscommunication between us.

I did just now find this though that I think confirms what I wanted to know.

363-675 - Property becoming excluded property

Occasions of charge on or after 6 April 2025

There is no occasion of charge (exit charge) where settlement property becomes excluded property under s. 48ZA (see ¶684-140) either because it ceases to be situated in the UK or because it is invested in a holding in an authorised unit trust or a share in an open-ended investment company (IHTA 1984, s. 65(7),(7A))

Example

Alessandro (who is not a long-term UK resident) settled shares in a UK company on trust for the benefit of his grandchildren in May 2025. In August 2027, the trustees sold the shares and invested the proceeds in units in an authorised unit trust scheme. Alessandro is still alive and is still not a long-term UK resident.

In August 2027, the settled property becomes excluded property because it becomes invested in an authorised unit trust and the settlor (who is still alive) is not a long-term UK resident. It thereby ceases to be relevant property (because relevant property does not include excluded property (IHTA 1984, s. 58(1)(f); see ¶363-600), but there will be no exit charge.

8

You said the trust held “solely UK situs assets on 6 April 2025”. If they are now reinvested in excluded property there will be a charge to tax under s. 65(1)(a), It will not be protected by subs(7) because that only applies where the assets were excluded property but ceased to be so on 6 April 2025 because the status of the living settlor changed to long-term resident and without that derogation the excluded property would have become taxable.

If your client was at some stage deemed domiciled he may have settled the trust initially when non-domiciled. The assets of that trust would have become excluded property at that time if the assets were then non-UK. Apparently they either then were or later became UK situs which brought them into charge. Non-dom settlors usually strive not do that. The fact that you are now contemplating changing the trust assets to foreign property indicates to me at least that they currently are not. So they either never were foreign or at some earlier date seem to have ceased to be so. I have no idea whether the trust assets became UK situs accidentally or by design, with or without advice, but non-doms usually try very hard to avoid that and retain the IHT shelter.

If the trust assets were UK situs on April 5 and 6 2025 they were chargeable to IHT and remain so and if they now cease to be there will be an exit charge.

Please do not expect me to comment further.

Jack Harper

9

I just want to make sure that I was being clear about my view on the interaction of s.65(7) and s.48ZA as reading back my posts I might not have been. I am as capable of obfuscation as anyone.

The technical fix was aimed at a curious possibility that could otherwise have occurred simply as a result of the change from a domicile, including deemed, system to a residence system. Foreign property might have been relevant property of a RPT under the old rules because it was not protected by the settlor’s non-domicile, so it must have been settled after he became domiciled.

Such an individual might have become under the new rules a person who was not a long-term resident, despite still being domiciled in the UK under the old rules. S.48ZA would have forthwith dictated that any foreign property in his trust became excluded property. There was no change in its actual situs. But without s.65(7) there would have been an exit charge under s.65(1)(a) because it would have ceased to be relevant property.

The subsection only nullifies the charge. The property itself only remains excluded property as long as the settlor remains a non- long term resident. An actual change in the situs of trust assets from UK to foreign is not protected from the exit charge by the subsection because it is not caused by s.48ZA coming into force but by the actions of the trustees in changing the locality of the assets.

If an individual under the old rules settled foreign property when he was non-domiciled it would retain its excluded property status even if later he became domiciled in the UK. That is no longer the case if he settles foreign property when not a long-term resident. If he later becomes such it then becomes potentially chargeable though the change is not itself an event of charge.

After 5 April 2025, if the settlor is alive and a long-term resident at the date of the next RPT chargeable event, exit or TYA, that foreign property will be chargeable. See IHTM47052, example 2. The example goes on to assume the settlor dies while still long-term resident. This is not a chargeable RPT event but it could cause a GROB charge if the trust fund is GROB property. Once the settlor has died their status is fixed as regards any future RPT charges.

Under the old rules foreign property originally settled by a non-dom did not lose its excluded property status just because the settlor became domiciled. It
did lose it if it was later converted to UK property. There was no charge to tax then but if it switched back to foreign there was. A reservation did not count as a GROB if it was in excluded property but did once it became UK situate.

The position now is that the status of a living settlor at the time of the chargeable event is what matters. If then he is a long-term resident all the trust property is chargeable wherever situate. If he is not then foreign trust property will be excluded from the charge.

Jack Harper

10

Jack my understanding is that in this situation there is an exit charge and this is included in HMRC’s paper on this - “For settlements with a UK-domiciled settlor who is not long-term resident, this will mean that non-UK relevant property becomes excluded property and so an exit charge will arise on 6 April 2025. However, there will be no ongoing charges whilst the settlor remains not long-term resident” Reforming_the_taxation_of_non-UK_individuals.pdf

The change that creates the IHT charge is the settlor’s non-UK LTR status rather than change to the situs of the assets and so S65(7) does not offer protection.

@Hutchy74 I believe section 65(7) would apply in your case if the trustees were to sell and reinvest in non-UK assets. On 6 April 2025 as a result of the settlor becoming non UK LTR under the new rules the trust became an excluded property trust but as it only held UK assets at the time there was no exit charge and the assets remained liable to UK IHT. If the UK assets are now divested and taken offshore while initially this could fall into section 65(1) as it ceases to be relevant property section 65(7) should override and no exit charge should arise. The change in exposure arises due to the change in situs of the assets.

Pre 6 April 2025 an excluded property trust could acquire and dispose of UK assets freely and provided they did not hold any when a chargeable event arose for IHT there would not be a tax charge - there was no exit charge when ceasing to hold UK assets under 65(7). Now a trust excluded from IHT on non-UK assets by reason of a non-UK LTR settlor can do the same.

If your settlor were to resume UK LTR status in the future and then lose this at a later date an IHT exit charge would arise on foreign assets as the charge is not arising because of the situs of the assets but the settlor’s status so not covered by 65(7).

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11

Thank you for taking the time to comment. That was my understanding but it just seemed a little unfair!

12

I know I said I wouldn’t but

..

There is no such thing as an “excluded property trust” but I take it that you mean by that a trust settled by a non-domiciled settlor before 6 April which contained only excluded property. Frequently such a settlor had an QIIP in it or either had a NQIIP or was a discretionary beneficiary, so potentially a GROB existed although not operative while the only trust property was excluded property.

While the trust remained in that state it did not matter if they the settlor later became domiciled in the UK. Settlors strove to preserve this arrangement intact as an IHT shelter. That was especially so if there was such possible GROB exposure.

It was therefore risky for the trust’s excluded property to be converted into UK situate assets, including Sch A1 assets. That was not itself a chargeable event, whether the trust was in the QIIP or RPT category. If there was a GROB exposure in principle it did thereupon attach to the UK assets of the trust.

Each regime plus GROB rules would thereafter apply to the UK assets on any later chargeable event but not to any remaining excluded property in the trust.

A termination charge would apply if a QIIP ended in UK assets and there would be a GROB in them if the termination event was death or a s.102(4) FA 1986 deemed PET on a lifetime termination event. But these charges could be avoided if the assets were reinvested back into excluded property before any such chargeable event occurred. The reinvestment was not itself a chargeable event. This was the same treatment accorded to non-settled assets. If there was a GROB exposure it ended so a deemed PET occurred.

With an RPT the UK trust assets would then become exposed to exit and 10 year charges; the conversion was not itself a chargeable event. But reinvesting them back into excluded property WAS a chargeable event under s.65(1)(a) because, although the UK assets did not leave the trust, they ceased “otherwise” to be “relevant property”. Any GROB exposure then ended so there was a deemed PET.

The OP gave us the facts that the settlor had become deemed domiciled and his trust was fully invested in UK assets. We were not told of the precise sequence of events or whether there was a GROB exposure but the context made clear that it was an RPT settlement. By 6 April 2025 the settlor had ceased to be UK resident and, we were told, did not become a long-term resident. His change of status from deemed domiciled may have occurred before that date or continued up to it. But the loss of it and the acquisition of LTR status on that date were and are none of them exit chargeable events because the assets were and still are UK assets within charge to UK tax. There was no s.65 (1)(a) charge, because no UK property became excluded property, for s.65(7) to protect. That subsection is designed to avoid such a charge where a settlor became LTR on 6 April 2025 and the trust’s FOREIGN property immediately became excluded property whereas before it was relevant property because he was then UK domiciled and even the trust’s foreign property was in charge to UK tax.

If a settlor becomes LTR the UK trust assets remain UK assets and there is no immediate exit charge. If the assets are later converted into foreign property there is an exit charge but s.65(7) does not protect against it because it does not result from the introduction of new s.48ZA and the consequent change to LTR status of the settlor but from the later conversion of the assets from UK to foreign.

Contrast the example of Katerina IHTM47023. Her foreign trust assets were not excluded property because she was UK domiciled. They became such on 6 April 2025 so there was a s.65 exit charge but s65(7) does not assist her because it was not a case of her UK trust assets thereby ceasing to be relevant property. In fact it seems unnecessarily mean that this charge is not relieved.

The charge envisaged in the OP will arise when UK assets change
situs by the chosen deliberate act of the trustees. The assets simply do not cease to be thereby UK situated through the operation of s.48ZA. The acid test is that they have not changed situs and need not ever do so if the trustees do nothing. Plainly the situs change cannot have been caused by the new section and the settlor’s new status for IHT.

Jack Harper

13

Laura, you may think it is unfair but the chargeable event that occurs when UK assets of a RPT are converted into foreign assets and so excluded property has been in place since the legislation was first enacted. And at least it can be avoided by not doing that.

The obvious question is: if your client, if he indeed did, set up a trust with excluded property before becoming deemed domiciled, why did the trustees then convert the foreign assets to UK assets?

Some trusts suddenly acquired UK assets involuntarily when Sch A1 was enacted as from 6 April 2017 and not only was there no exit charge relief if they were later converted to exclude property
but sale proceeds could not be reinvested in excluded property for 2 years afterwards.

Jack Harper