The UK tax implications facing offshore excluded property trusts

A trust may benefit from excluded property status, insofar that the trust’s settlor was non-UK domiciled and non-UK deemed domiciled as at the time of settlement, and on any later addition of funds added into the trust thereafter. 

To the extent that the trustees of an excluded property trust hold UK situs chargeable assets on a 10-year anniversary date since a trust’s creation, or on a UK situs asset transferred out from a trust absolutely, a charge to IHT (inheritance tax) may arise. Where applicable, the relevant charge equates to approximately 6% of the value of the trust’s UK assets. 

Where an excluded property trust is regarded as settlor interested (thus where the settlor is not irrevocably excluded under the terms of the trust), upon the demise of the settlor, any UK situs chargeable assets then held are equally subject to IHT at the settlor’s death rate of 40%. 

Accordingly, insofar that the trust only contains non-UK situs assets directly, and no UK residential property interests are held by the trustees indirectly (e.g. via an underlying offshore company), exposure to IHT for the trustees and that of the settlor (if the settlor is not irrevocably excluded) can be fully mitigated, thus providing for the opportunity to pass wealth through the generations free of any exposure to IHT - whilst also ensuring that the settlor can continue to enjoy access to the trust’s fund during his lifetime. 

Equally, and virtue of the fact that the trustees are non-UK resident persons, a trust’s exposure to UK income tax is limited to that of its UK sourced income only, and in relation to CGT (capital gains tax), only in relation to any gains realised upon the disposal of a UK immovable property asset. 

Thus, retaining only non-UK assets in trust, can further remove a trust’s exposure to UK income and CGT. 

Where a UK resident beneficiary receives a trust benefit, their exposure to UK tax will depend upon the levels of the available income and/or gains that have been stored in the trust.  

If, however, the settlor is a UK resident, exposure to UK tax for the settlor may even arise should the settlor not directly receive a trust benefit during a year. 

The UK’s tax legislation which determines a UK resident settlor’s and/or beneficiaries’ exposure to UK tax is vast in its complexity, and it carries a wealth of anti-avoidance legislation which should be considered annually. Nevertheless, where the trust has not been established with a UK tax avoidance motive, it remains possible to provide settlors and beneficiaries with trust distributions in a tax efficient manner. 

Finally, it should be noted that whereas excluded property trusts, if managed correctly, can operate tax efficiently, it is imperative that such trusts are not later tainted (i.e. added to by a settlor at a time when he has attained a UK deemed domiciled status), as in doing so, may result in the trust effectively becoming tax transparent.