A trust client holds an investment portfolio offshore which is excluded property for IHT purposes (the settlor died many years ago, and he was non-domiciled at the time).
The trust is now UK resident and the trustees are considering appointing assets absolutely to UK beneficiaries.
Some funds will be retained by the trust, but are likely to be moved to the UK for the trustees to manage going forward for minor beneficiaries.
This is a relevant property trust, and up until now the trust assets have been wholly excluded property.
I need to understand how the assets ceasing to be relevant property is dealt with from a UK IHT perspective.
To keep things simple, let’s say that the total trust assets are currently worth £2m, and that £1.7m will be distributed directly to beneficiaries, with £300k being brought onshore and remaining on trust.
Is this simply treated for UK IHT purposes as assets being added to the trust on the date of onshoring to the tune of £300k when we come to look at future ten year anniversary charges and exit charges, or is there some other way in which this is calculated?
I suspect that this is much more complicated than I hope, but any pointers / links to guidance would be much appreciated.
The new law is contained in s48ZA IHTA. Settled property can still be excluded if it is situated outside the UK and not deemed to be situated there by Sch A1.
There is a “grandfathering” let-out where the settlor died before 6 April 2025 and was not domiciled, old rules applying including deemed domiciled, in the UK when “the property became comprised in the settlement”. So when originally settled and at the time of any later addition. Property acquired with settlement income is acquired at the same time as the property the income arose from.
But there is an exception: settled property is not excluded if at any time an individual has been beneficially entitled to a qualifying interest in possession while domiciled in the UK before 6 April 2025 or a “long term resident” on or after that date. Or in any case if the interest was acquired for consideration. A reversionary interest in the settlement is excluded property if the individual is not a long term resident:s.6(1). This will apply to transfers and deaths on or after 6 April 2025, so non-domiciled for earlier such events.
The excluded property rule is not affected by the residence of trustees but it makes a critical difference for CGT. If the trust has become UK resident already it is too late to contemplate making distributions while it was non-resident and or ensuring that past losses are not wasted. Someone may have missed a trick and someone else may be cheesed off. Offshore trust tax CGT planning actually is rocket science.
A UK resident trust will be taxable on net gains on all its assets wherever located and there is no cost re-basing on its becoming resident.
The trust seems therefore as if it still may hold excluded property for IHT if there has never been a QIIP in it (fact omitted) but if it acquires UK situate assets RPT charges will apply to later chargeable events on any such assets and 10 year anniversaries will be counted from its historic commencement date. A rate reduction applies for assets that have not been within charge the whole time.
A total distribution out of IHT excluded property will escape RPT but any capital gains will be liable to CGT with hold-over relief only for business/agricultural assets if the transferee is UK resident. If the distributions are made out of UK assets IHT will be chargeable but with hold/over relief for resident transferees.
If the beneficiaries are determined to have all the money out now then so be it but it will move from an IHT shelter into their IHT taxable estates if these are within charge. It would be possible to retain the IHT shelter by dividing up the existing non-UK funds and adopting different investment strategies if desired but this advantage may have been diluted by the trustees having become resident for CGT and wanting immediate distributions.
If the plan was not fully UK tax wargamed before implementation and beneficiaries not adequately advised they may be upset and inclined to target the trustees. The latter must accept responsibility for their decisions and the tax consequences unless perhaps they have ensured that their beneficiaries were aware of these and the alternatives in advance.
Many thanks for your reply, which is really helpful.
In this case, there has not been any QIIP, neither is UK CGT a consideration here.
In terms of the UK IHT calculation for the £300k that will potentially be brought onshore, I think that I understand this now - i.e. that the value at the next ten year anniversary (based on the trust’s historic commencement date) will be subject to IHT, with relief for the period before this came to the UK.
Similarly, for an exit charge, the property becoming relevant property is provided for in the calculation in s68 5(d) TCGA.
It seems you are confusing ‘bringing onshore’ and UK situs assets. As Jack said, no IHT if no new assets are added as the trust maintains its non-dom status. CGT will be an issue, because disposal by non-resident trustee to make 1.7M distribution would have escaped CGT as non-residents are not chargeable to CGT unless its UK land. UK trustees selling the assets to make 1.7M distribution will need to pay UK CGT. You will need to check what part of £300k is uk situs on the 10 year anniversary.
Perhaps the most sinister effect of the new law is RPT property becoming excluded property on 6 April 2025 with an exit charge that no one anticipated: IHTM47023.
I meant that CGT is not a consideration for my query - the assets are first to be sold by the trustees, and the proceeds then appointed, so the trustees have already accepted that they will have UK CGT to pay.
The likelihood is that the whole of the £300k will be in the UK on the next anniversary, so I think that we will need to consider the UK IHT exposure either then.
My point is that ‘in the uk’ is different from UK situs. Assets that are Uk situs for eg. UK govt bonds, shares with GB ISIN, its the source you need to check, assets with US ISIN for eg, foreign bonds, etc even held by a UK broker, are not UK situs.