Chapter: 2 - Inheritance Tax Mitigation: The Basics

Non-UK domiciled settlors and excluded property settlements

2.12.3

With settled property, the trust assets will be excluded property if situated outside the UK and if the settlor was domiciled outside the UK when the settlement was made (IHTA 1984 s48(3)). This applies regardless of a subsequent change of domicile by the settlor or indeed changes in the trust property, provided that the property remains outside the UK. HMRC Trusts & Estates have traditionally accepted, and have recently confirmed, that the GWR rules are ‘out-flanked’ by the excluded property rules.  It matters not where the trustees are resident. 

This is the rule even if the settlor has an initial 'estate' interest in possession and dies UK domiciled with that interest and if his children also UK domiciled have successive life interests.  That said, there is one trap.  This applies where the settlement grants initial estate interests in possession to the settlor and/or spouse/civil partner and, at the time when the interest of the last of them to have such an interest ends (typically on the second death), that beneficiary is actually or deemed UK domiciled, but the settlement continues, generally on or after 6 October 2008.   Regardless of whether there is a continuing ‘estate’ interest in possession (as a transitional serial interest: see 4.6.7) or the relevant property regime applies, the UK domicile of the deemed settlor will mean that the erstwhile protection of excluded property settlement status is no longer available, even if the trust fund is situated outside the UK (under IHTA 19804 s80).  See 16.6.3.

(There used to be thought to be another trap arising from the rule that where (in any case) property ceases to be subject to a reservation, the donor is treated as making a PET (FA 1986 s102(4)).  Accordingly, if the trustees were to exclude the settlor from benefit and he dies within seven years, he would be treated as having made a chargeable transfer, even if the property in the settlement is excluded property.   Happily, however, in 2011 HMRC Trusts & Estates confirmed that the excluded property rule in IHTA 1984 s3(2) takes priority over s102(4) and so (in their view at least, though not in the view of all commentators) the point falls away.)