IHTM27220 - Property excluded from Inheritance Tax: foreign settled property with non-UK domiciled settlor

IHTA84/S48 (3) and IHTA84/S80 to 82 mean that property situated abroad and held in a settlement is excluded property unless the settlor was domiciled ( IHTM13000) in the UK at the time the settlement was made.

Beware of property that may be subject to the gift with reservation rules ( IHTM14396)

In the case of property settled by Will, or under the rules of intestacy ( IHTM12000), it will of course be the date of the testator’s or intestate’s death. This does not apply to a reversionary interest in that settled property. ( IHTM27230).

Moreover there are additional requirements for settlements without interests in possession or discretionary trusts that fall within certain anti-avoidance provisions. (IHTM27246) You will therefore need to determine whether a settlement is a non-interest in possession or discretionary trust for IHT purposes and, if so, whether the additional requirements are relevant and (where appropriate) satisfied. If unsure seek advice from TG in IHT Belfast or Nottingham. In Scotland, refer to your Team Leader.

(This text has been withheld because of exemptions in the Freedom of Information Act 2000)

Once you have determined that any property held in a settlement is excluded property:

• IHTA84/S53 (1), - you must not tax that property on the termination or coming to an end of an interest in possession in the property
• IHTA84/S58 (1)(f) and 70(7), - if the trusts applying to the property are discretionary then in determining the rate of any discretionary trust charge, you must disregard that property for the period(s) when it was excluded property.
• IHTA84/S48 (3), - The legislation refers to the settlor's domicile "at the time the settlement was made". You must proceed on the basis that, for any given item of property held in a settlement, the settlement was made when that property was put in the settlement. Consult TG or your Team Leader (Scotland) if this view is challenged.

S, when domiciled abroad, creates a settlement of Spanish realty. Later he acquires a UK domicile and then adds some Australian property to the settlement.

The Spanish property is excluded property because of S’s overseas domicile when he settled that property. However, the Australian property is not excluded property as S had a UK domicile when he added that property to the settlement.

Example 2

S, when domiciled in Germany, settles some German realty and some securities then situated in the UK on X for life with remainder to Y. On X’s death - the potentially chargeable event - the settled fund consists of:

• Option 1, a villa in Spain, or
• Option 2, land in the UK, or
• Option 3, a house in Spain and some English securities.

In Option 1, the villa is excluded property even though it partly represents the proceeds of what was previously UK property (i.e. the securities). The land in Option 2 is not excluded property although it is partly derived from the German realty. In Option 3 the house is excluded property but the securities are not.

It follows that as a general rule property settled by a UK domiciliary is not excluded property - and is therefore within the scope of IHT - regardless of the locality of the property. This is so even if any person entitled to an interest in possession in the property (who is treated under IHTA84/S49 (1) as being beneficially entitled to the property) is domiciled abroad, subject to the possible exception that a Double Taxation Convention overrides this rule. Refer any such claim to TG.

Likewise refer to TG or your team leader in IHT Edinburgh any claim that “proper law” overrides this general rule IHTA84/S158 (1) and (6).