Finance Bill 2020 introduces provisions that confirm that property added to a settlement or transferred between settlements after the settlor has become UK domiciled or deemed domiciled cannot generally be excluded property for UK inheritance tax purposes.
Section 48(3) of Inheritance Tax Act 1984 (“IHTA”) currently states that excluded property is property situated outside the UK “unless the settlor was domiciled in the United Kingdom at the time the settlement was made…”
As a result, many commentators argued that if a non-UK domiciled settlor settled non-UK situs property onto a settlement after becoming UK domiciled or deemed domiciled, the property continued to be excluded property.
Finance Bill 2020 replaces the phrase “time the settlement was made” in section 48(3) IHTA with “time the property became comprised in the settlement”. As such, the domicile position of the settlor will need to be considered every time property is/has been added to the settlement, especially given that the change has retrospective effect.
These changes will primarily affect UK domiciled or deemed domiciled individuals who have created an offshore trust when they were previously non-UK domiciled and have subsequently made additions of assets to that trust.
In addition, where property is transferred from one settlement to another, the property will only remain excluded property if the settlor of the transferring settlement remains non-UK domiciled at the time of the transfer. This is to counter the decision in Barclays Wealth Trustees (Jersey) Ltd & Michael Dreelan v HMRC, where it was held that the excluded property status of property transferred between trusts was dependent on the settlor’s domicile status at the time the settlement was first established, rather than the settlor’s domicile position when the property was transferred.
In contrast to the change outlined above regarding additions to settlements, this latter change does not have retrospective effect and only needs to be considered from the date the Finance Bill receives Royal Assent.