Excluded Property Trusts: A Strategic Solution for UK Non-Doms?

Whether the non-dom regime is left alone, scrapped or further amended, the current uncertainty surrounding its future highlights the potential benefit, for any current or prospective foreign nationals in the UK, of setting up an Excluded Property Trust, and to take the opportunity to do so while it is still there. But, what is an Excluded Property Trust? What are they used for? Why should they be considered?

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What is an Excluded Property Trust (EPT)?

An EPT is a type of trust arrangement where certain assets are held outside the UK, providing significant tax and planning advantages for non-domiciled residents.

An EPT is a separate legal entity, which takes on the domicile of the settlor at the time the trust is created. More importantly, the trust retains its original domicile status regardless of what subsequently happens to the domicile of the settlor, which means in situations where the settlor subsequently becomes domiciled in the UK, the assets held within the EPT will ordinarily remain outside the scope of IHT.

It is important to highlight that this type of trust is not suitable for individuals who were born in the UK with a UK domicile of origin at birth, and who are currently UK tax resident.

Changes to the Non-Dom Regime

The UK’s recently proposed tax law revisions will alter the landscape for non-domiciled residents, likely impacting how foreign incomes and gains are taxed. These changes underscore the importance of efficient tax planning strategies, and how the utilisation of EPTs may be advantageous.

When is an individual considered non-domiciled?

Domicile is a legal concept and unlike residence, you cannot be domiciled in more than one country or have no domicile at all. Domicile is initially decided at birth, normally as the permanent home of an individual’s father.

The current HMRC rules deem an individual UK domiciled when they have been resident in the UK for at least 15 of the last 20 tax years. Where an individual is UK domiciled, they will be subject to income tax, capital gains tax (CGT) and assessed for inheritance tax (IHT) on their worldwide assets.

Non-domicile (non-dom) is a British tax status that is over 200 years old. A non-domicile is an individual that is resident in the UK but whose domicile is outside of the UK. It relates to an individual’s tax status not their nationality, citizenship or resident status. You can be considered a non dom in two ways – domicile of origin or domicile of choice.

An EPT can be a beneficial entity for those currently deemed non-domiciled in the UK who might have assets in excess of the IHT thresholds and want to mitigate IHT when they eventually become UK domiciled.

What is an EPT and what qualifies as ‘Excluded Property’?

A trust can be set up as an EPT where its settlor is neither domiciled nor deemed domiciled in the UK at the time the trust is established and the assets to be settled are non-UK assets at all times.

‘Excluded property’ in the context of an EPT refers to assets that are outside of excluded from the scope of IHT, usually situated outside of the UK.

EPTs are versatile in terms of the investments they can hold. Common examples include overseas real estate, foreign stocks, cash and shares.

Uses of Excluded Property Trusts

EPTs can be used in various ways:

Asset Protection: Safeguarding international assets from UK legal claims.

Estate Planning: Facilitating the efficient transfer of wealth across generations without attracting UK inheritance tax.

Tax Efficiency: Mitigating exposure to UK taxes for non-domiciled individuals.

Benefits of Using an EPT

Tax Advantages: EPTs can offer protection against UK inheritance tax on foreign assets and can also provide capital gains tax benefits under certain conditions.

Legal Protection: Assets within an EPT are not subject to claims under UK jurisdictions, offering a robust defence against domestic legal actions.

Succession Planning: Like most trusts, an EPT can allow for wealth to be passed down generations without the need for a will or probate and also in overcoming restrictions in foreign succession law.

Confidentiality and Control: Trustees manage the assets per the trust agreement, maintaining confidentiality and allowing the settlor to dictate the terms of asset management and distribution.

Should the EPT earn income, it can capitalise and retain said income which will also be considered excluded property.

Tax Advantages

Income Tax: By its very nature, any assets held in an EPT are not subject to UK income tax.

Capital Gains Tax (CGT): Assets within an EPT are not subject to UK CGT, which means should the assets increase in value, they will not be taxed in the UK, which could provide a significant potential tax-free growth over time.

IHT: EPTs can offer protection against UK inheritance tax on foreign assets. Furthermore, once set-up, an EPT is not subject to the same on-going IHT charges that affect UK domiciled relevant property trusts. There is no chargeable lifetime transfer (CLT) as the transfer is exempt under the excluded property rules.

Setting Up an EPT

Establishing an EPT involves selecting appropriate trustees, defining the terms of the trust deed, and transferring assets into the trust. It is advisable to seek the appropriate specialised advice and assistance to ensure compliance with all relevant laws and to maximise the benefits of your trust arrangement.

Key Statutory Officers/Roles

Trustee: Responsible for managing the trust’s assets according to the trust’s terms and for the benefit of the beneficiaries.

Settlor: The individual who establishes the trust, transferring assets into the trust. They typically have no further control over these assets unless explicitly provided for in the trust deed.

Beneficiary: The person or people who benefit from the trust. They have rights to the trust’s assets or income, as stipulated in the trust deed.

Protector: Often appointed to oversee and provide checks and balances on the trustee’s actions, sometimes with specific powers to intervene.

Considerations

1. Maintaining excluded property status – It is important that an EPT maintains its excluded property status as per its set-up. For this reason, where a settlor’s domicile has changed, further assets should not be settled into the EPT which may result in it losing this status.

2. Investments in companies that invest in UK residential property – care should be given to the trust holding shares in overseas companies that themselves hold residential UK property as they remain within the scope of IHT irrespective of the trust’s domicile.

3. Non-UK assets – it is important that any assets settled are non UK assets at all times, including upon the trust’s establishment, in such instances that capital is distributed from the trust, upon the 10-yearly anniversaries of the trust and on the death of the settlor.

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Interested in exploring how an Excluded Property Trust could benefit you? Contact us for a free, no-obligation chat to discuss your requirements further.

This information is for guidance purposes only and is not nor should it be construed as any form of professional legal or tax advice. We strongly recommend that anyone looking to establish this kind of structure does so after consulting with a professional tax advisor who will consider your specific circumstances.