From 22 July 2020, any property added to an "excluded property settlement" after a settlor becomes UK domiciled or deemed domiciled will fall within the scope of inheritance tax.
An "excluded property" settlement is a trust created and funded by a non-UK domiciled individual that contains non-UK assets. Excluded property falls outside the UK inheritance tax charge. In other words, non-UK assets owned by such a trust are not liable to inheritance tax charges, provided that the settlor was not UK domiciled (nor deemed UK domiciled for inheritance tax purposes) when the trust was set up.
The Finance Act 2020 became law on 22 July 2020. This has confirmed that property added to an excluded property settlement or transferred between settlements after a settlor becomes UK domiciled or deemed domiciled will cause the property transferred to fall within the scope of inheritance tax. This means that the trustees can be charged inheritance tax on several different occasions in respect of such property, as follows:
- on creation of the trust;
- on the trust's 10-year anniversaries; and
- on distributions from the trust.
As usual, any charge to inheritance tax will be subject to the relevant conditions, exclusions and reliefs. Given the value of assets that can be held in such trusts, any inheritance tax charge may be significant.
It is now therefore essential to test the domicile of a settlor every time funds or assets are transferred between, or added to, excluded property trusts. It is no longer possible to rely on the fact that the settlor was non-UK domiciled when the settlement was created.
This is likely to complicate matters for trustees where: (a) the settlor has created a number of trusts and is now deemed domiciled; and (b) the trustees wish to make additions to or transfers between settlements, even where this is for good commercial or fiduciary reasons that are unrelated to tax.