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Taxation Readers’ Forum: Excluded property trust

/ 16 August 2021

Terry Jordan

Writing for Taxation magazine’s Readers’ Forum, BKL tax consultant Terry Jordan responds to a reader’s query about inheritance tax due on an excluded property trust.

‘In February 2010, my client bought into an established excluded property trust, situated in the Isle of Man, to mitigate his liability to UK inheritance tax (IHT). The assets of the trust were held as cash in an Isle of Man bank account. He died in September 2010, and since 2017 we have been in dispute with HMRC about whether inheritance tax is due on the sum involved.

My case is very similar to that of Salinger (TC5407) , which was won by the taxpayer. I believe that HMRC appealed but the appeal was not heard because the Salinger family conceded rather than face further legal costs if HMRC ultimately won.

HMRC has issued notices of determination in our case and, we understand, in other cases as well. Those determinations are under appeal. HMRC’s statement of case centres on whether transfers of value were made when my client bought into the trust. The case is therefore likely to turn on valuation evidence.

Are readers aware of HMRC’s position in other cases involving the same structure? Are there any other grounds other than valuation on which HMRC can be challenged? Is anybody acting for clients who are also involved in litigation this issue?’ Query 19,796 – Concerned.

Terry Jordan’s reply: The courts may not take a sympathetic view to this kind of planning

‘Inheritance tax is charged by reference to a person’s domicile.  For those domiciled within the UK the charge extends to their worldwide assets and, conversely, for those domiciled outside the UK the charge is limited to UK situs assets.

As well as domicile at general law it is necessary to consider the deeming provisions in IHTA 1984, s 267. Until 5 April 2017 the relevant provisions deemed a person who was domiciled outside the UK at general law to be domiciled within the UK for the purposes of the inheritance tax charge (and for the purposes of the income tax charge on pre-owned assets if they had been UK resident for 17 out of 20 tax years. From 6 April 2017 the period became 15 out of 20 tax years, and the deeming was extended to all taxes.

Non-UK situs assets in the hands of a non-UK domicile (and, with effect from 16 October 2002, holdings in authorised unit trusts and shares in open-ended investment companies (OEICS)) are termed ‘excluded property’ (s 6) and are outside the scope of the tax. Section 48(3) extends excluded property treatment to such assets comprised in a settlement if the settlor was domiciled outside the UK when the property became comprised in the settlement.

The wording of the subsection was amended last year to make it clear that the domicile of the settlor when additions were made to the settlement is relevant as well as the domicile when the settlement commenced. Excluded property treatment is denied if the settlor, although non-UK domiciled when the settlement was made or added to, was born in the UK with a UK domicile of origin and becomes tax resident here.

We are told that Concerned’s client bought into an Isle of Man trust in February 2010 and died later that year. It is implicit in the query that he was domiciled within the UK. In simple terms s 48(3B) precludes excluded property treatment if a UK domicile buys an interest in possession. Dymond’s Capital Taxes includes commentary on the Salinger case, with apparently similar facts to Concerned’s client, at 18.203:

‘The First-tier Tribunal found that Mr S had acquired the reversionary interest as part of a package of rights for which he had paid consideration of £890,000. The reversionary interest was therefore not excluded property. However, the tribunal concluded that there had been no loss to Mr S’s estate as a result of the transfer because the reversionary interest was more or less valueless. In particular, the transfer of the reversionary interest had not prevented Mr S from accessing the Manx trust fund “as a matter of right” after he acquired the income interest an hour later as he remained the only beneficiary until the end of the trust period. There had therefore been no transfer of value.

‘This seems an odd view. Clearly, if he had retained both interests he could have forced the trustees to pay him income and capital. But, by assigning the reversionary interest, he was losing any ability to require the trustee to pay him anything under his income interest during the trust period, as he had no right to receive anything and no power over the trustees. The tribunal held that as he had not been entitled to both interests at the same time Saunders v Vautier could not apply. However, then the payment of the £820,000 would itself be a significant transfer of value as he was effectively buying an interest in a trust fund which actually entitled him to nothing. Nevertheless, the tribunal suggested that a third party would have been prepared to pay around £820,000 for the income interest immediately after the exercise of the option despite no evidence being given to support this view! In reality it is surely unlikely a third party would have paid that sum of money for an interest in a trust that entitled them to nothing but a discretionary interest. HMRC’s secondary argument failed viz that even if the assignment of the reversionary interest was not a transfer of value, the payment of cash for a bundle of rights under the trust in 2009 was a transfer of value.

‘If the tribunal is right and a discretionary interest in income and capital held for only one beneficiary during the trust period, but with envisionary interests thereafter, is really worth the full capital value of the trust fund such an interest would presumably be fully chargeable to IHT anyway on Mr S’s death…’

The planning undertaken by Concerned’s client some 11 years ago was arguably quite aggressive and in today’s climate the tribunal or a higher court might be expected to be unsympathetic.’

The article is also available on the Taxation website.

Our private client tax team have expertise in a range of areas including inheritance tax, trusts and the tax implications of non-domicile and non-UK residency status. For more information, please get in touch with your usual BKL contact or use our enquiry form.

Terry Jordan

Senior Adviser, Private Client

T +44 (0)20 8922 9360
E terry.jordan@bkl.co.uk

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