Non-UK domiciled individual died in 2011 and left her UK Estate (cash deposits) to her daughter who is resident in the UK. Daughter carried out variation of Will and redirected the Estate to a discretionary trust with her and husband (both UK resident) as trustees. The trust assets consist of a loan to the daughter.
The trustees need to file a ten-year anniversary IHT Account.
I don’t know what the advice was at the time the Deed of Varation was carried out as another firm were acting for the daughter. Given the deceased’s domicile status and the nature of the assets, I assume there would have been an opportunity to create a non-resident trust but as the trustees are both UK resident and the debt is owed by the daughter, the trust is UK-resident. Is that a correct reading or is there an opportunity to treat the trust as non-UK resident?
It’s UK resident but of course that isn’t a relevant factor for IHT, which turns on the situs of the assets. Here, if the sole asset is a debt owed by daughter, and the daughter is UK resident, then it will be relevant property.
You could consider replacing the loan with a speciality debt to move it offshore, but HMRC won’t like it!
For IHT the deceased is the settlor of a DT created by a s.142 variation. This is not the case for
CGT: the daughter would be the settlor because of the ridiculous decision in Marshall v Edwards, now enacted in s.68C TCGA. This reduces the CGT advantages of a NR trust with a resident settlor and the costs of NR trustees will be significant. In practical terms it is not on, unless she plans to change residence from the UK. NR trustees are liable to UK CGT on disposals of UK land and land-backed assets: ss.1A-D and Sch1A TCGA.
This is reinforced by the fact that the non-residence of trustees is almost never important for IHT and never for IHT planning. For IHT the domicile, and now long-term residence, status of the individual and the locality of the trust assets are what matters.
The deceased died non-domiciled. I will presume that this status is agreed with HMRC or is otherwise impregnable. The assets of the trust could therefore be “excluded property” if and to the extent that the trust assets were foreign property I.e. located outside the UK. It would not matter that the trustees were UK resident, save that where trustees were liable to UK taxes they would be within the jurisdiction for recovery. Even if non-resident HMRC can recover IHT from UK resident beneficiaries.
The locality of an unsecured loan is where the debtor resides: IHTM27091. A “specialty” debt is different depending whether it is unsecured or not and if secured whether on UK property. HMRC practice is set out in 27070. They do not mention this point, though a reference to Technical is made indicating trouble ahead, but only certain systems of law recognise the specialty doctrine and one such must be the governing law of the contract. HMRC might challenge the use of a law with no connection to either party. If the debt is not a specialty debt already, making it such might fall foul of the GAAR.
Since 6 April 2017 it matters whether the loan, even if itself located abroad, is within Sch A1 IHTA (indirect ownership of UK property). This will depend on what the daughter did with the loan monies. IHTM04313-7 deals with this and provides useful examples. Para 6 of the schedule contains a fearsome anti-avoidance provision even without the GAAR.
It would be theoretically possible for the trustees to dispose of the loan, by repayment of it, and investment in foreign property. It would become excluded property for future RPT charges under s.48ZA(5) but there would be an exit charge under s.65(1) because it would cease to be relevant property by becoming excluded.
Repayment of a loan within Sch A1 and reinvestment in foreign property prevents that from being excluded property for 2 years.
The currency of the loan is immaterial. S.157 only helps with bank accounts on the death of a non-dom or non-long-term resident.
I think Jack Harper deals with the law in exemplary form. The only thing to add, I think, is that, subject to rules about UK land etc, the trustees might consider an assignment of the debt to a foreign company, which they create, so that the shares in the company are excluded property and the debt itself never passes by inheritance or gift. I suppose the trustees, if they found a friendly foreign entity, could lend money (borrowed or otherwise) to the entity so that it could buy the UK debt.