Extent of UK IHT on settlor interested non excluded property trust assets

I am looking at what I originally thought was the impact of Schedule A1 IHTA 1984 on a non-domiciled individual in respect of what I was told was a settlor interested excluded property trust. Settlor is not UK resident and not UK domiciled. Unfortunately, it appears that at the time of the Trust creation the settlor had only been non-UK resident for two years and there is no treaty override so the Trust cannot be excluded property.

The structure underneath the Trust is offshore company shares which previously held a trading business in the UK. The trade ceased a few years ago and therefore the offshore company now holds hybrid property (shops with residences above them) from which it receives rent.

The impact for the Trust is clear as the whole of the assets will be within the relevant property regime and in the absence of any BPR now the full value of the shares will be subject to UK IHT.

I am less clear on the impact for the settlor under the GWRB rules. Settlor is now non-dom and therefore s6 IHTA 1984 only brings into point UK situs assets. The assets actually settled are offshore company shares which (bar Sch A1) would be outside of the charge to IHT. But I believe we are still within Sch A1 for this element so I need to look at the total values of the resi property.

Is that correct?

Generally speaking, the GWR provisions are overridden by a trust’s excluded property status. Hence, if at the date of the trust’s set up the settlor was non-UK domiciled, the offshore company’s shares held in trust would rank as excluded property. Even if the settlor had reserved a benefit, excluded property status would override the reservation of benefit provisions.

However, post F(No 2) A 2017, the offshore company shares will no longer rank as excluded property if the UK property held by the offshore company is/includes UK residential property. If the settlor has reserved a benefit in such offshore company’s shares the reservation provisions will apply.

Malcolm Finney

Thank you Malcolm. I agree if we were dealing with an excluded property trust your reply is all in point. However, the Trust is likely not excluded property as the settlor was deemed dom by virtue of the three year tail rule as he had only been outside of the UK for less than two years. So even if there was an argument that he acquired a domicile of choice outside the UK on the day he left, he would still be deemed dom for the first three years and therefore it cannot be excluded property.

So my understanding is that the GWR rules will apply to all the Trust property as it is not an excluded property trust. However, as the client has never returned to the UK and arguably has a dom of choice outside the UK now, whilst the Trust is not itself an excluded property trust I’m trying to ascertain what the GWR rules mean in terms of actual assets being subject to UK IHT. As far as I can see, although the trust is not excluded (and therefore subject to the RP regime) the extent of my non-dom individual is still restricted to the value of the offshore shares relevant to residential property. i.e what he would be subject to if he had continued to hold the shares personally rather than putting them in Trust.

I am so used to dealing with non-doms in the situation you described that where it is not an excluded property trust but the settlor has since become non-dom has thrown me.