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  • Katherine Bullock

Practical Magic – Estate Planning – Suggested ingredients for non-doms

This week I am making a whistle-stop tour of some essential things to look at when considering UK IHT in connection with a non-UK-domiciled individual. My list is not definitive – full advice is critical before taking any action; these are offered only to spark ideas and help with the thinking process. I’ve included some pitfalls as well as some general principles. Without further ado:

1. Using the spouse exemption to avoid a GROB

HMRC now appears to accept that the spouse exemption is available where settled property in which the settlor has reserved a benefit becomes comprised in the spouse’s estate on death.

Since FA 1986 s.102(3) treats the asset as part of the donor’s estate immediately before death, and a person with an IPDI is treated as beneficially owning trust property, it may be possible to reorganise a trust to create a new trust for the spouse, effective from the date of the donor’s death, and use the spouse exemption to avoid the GROB charge.

2. Adding property to excluded property trusts

Since FA 2020 reversed the position held by the Court of Appeal in Barclays Wealth Trustees (Jersey) Ltd & Anor. v HMRC [2017] STC 2465 it is vital to recheck IHT arrangements where either the settlor adds to an excluded property trust once UK domiciled or where there is a transfer between relevant property trusts after the settlor becomes domiciled or deemed domiciled.

Of special note are GROB charges, which are no longer excluded for affected trusts after the 22 July 2020 changes. Also bear in mind that while death cannot create excluded property status, it may restore it!

3. Consider other ways to add value

It may be possible to add value to an excluded property trust after the settlor becomes domiciled without making an addition. Omission to charge interest is not, strictly speaking, an addition of property to the trust.

It could also be argued that gifts to a non-resident company in which the trust holds shares adds value without risking the excluded property status. This does rely upon the Courts taking a purposive construction – something that cannot be guaranteed!

4. Accumulations of income are additions when the original property was added

Accumulations of income are treated as added to a trust when the income is accumulated, unless it falls under IHTA 1984 s.65(8A), where it is treated as added at the point where the capital which produced the income became comprised in the trust.

5. Can that debt be deducted?

Although the deductibility of debts for IHT purposes is restricted as of 17 July 2013, a loan taken out at the time of purchase or improvement of an asset may provide an IHT deduction.

6. Watch out for unexpected 10 year and exit charges

As of April 2017, all UK residential property owned by a non-dom will be charged IHT, regardless of residence or enveloped status. As a result, trusts holding residential property directly or indirectly should consider ten-year and exit charges, since holding the property in an offshore company no longer secures protection as excluded property.

7. Valuation pitfalls and opportunities where UK residential property is held in an offshore company

Firstly, the IHT charge disapplies excluded property status on the value of the interest attributable to UK residential property. It does not levy a charge upon the value of the land itself.

Secondly, there is no de minimis amount: any UK residential property at all will result in a charge, regardless of how small a proportion of the trust or the use to which that property is put.

Thirdly, discounts due to percentage shareholding will apply and are not aggregated. Five people holding 20% of shares each will each get a significant discount.

Fourthly, the charge does not apply if the value of the interest in the close company is less than 5% of the total value of all the other interests in the close company. Not the same as the value of 100%. For these purposes there is an aggregation of connected party interests.

Finally, borrowing to buy residential property will not reduce the charge, but borrowing to buy non-residential property will reduce the value of across the board, including the residential properties, and thus the charge.

8. An open company breaks the chain

Companies must be close. An open company is not caught and will break the chain.

9. Watch out for lenders as participators

Loans to companies are not relevant loans but may mean that a creditor may have a relevant interest in the company as a participator. For trustees making such loans, this may mean 10-year and exit charges, where they hold no shares.

10. Spot relevant loan assets

A relevant loan asset in the hands of the lender is chargeable to IHT (Sch A1 paras 3 and 4) unless it is a loan to a company.

To decide if a loan is a relevant loan: • Is the borrower an individual, trust, or partnership? • Was the loan used directly or indirectly to finance the acquisition, maintenance, or enhancement of a UK residential property interest?

The rules may catch: • Loans to service interest on a loan to buy UK residential property (but not SDLT) • Loans to acquire an overseas property which is sold and replaced by UK residential property • Loans to acquire a company that owns or acquires UK residential property.

11. Dispose of the property to end the relevant loan dilemma

A loan ceases to be a relevant loan when the property is sold, regardless of whether or not the loan is repaid.

12. Things to watch on collateral

The provision of money as collateral, security or guarantee for a relevant loan is not excluded property. If trustees borrow from a bank and the non-domiciled settlor deposits sums with the bank as guarantee, the deposits may not be excluded property of the settlor and chargeable to IHT. Watch out for double charges. As a loan to a close company is not a relevant loan, collateral provided on a loan to a close company is not caught.

The two-year rule does not apply to collateral. Once collateral is released the provider is outside the charge to IHT whether or not the UK residential property is sold.

13. The Two Year Rule

Property is not excluded property for two years if it is consideration for the disposal of an interest in a close company or partnership holding residential property/relevant loans or proceeds from the repayment of a relevant loan or satisfaction of a creditors’ rights.

It may be arguable that assignments or disposals of relevant loans are not caught as a disposal of a loan for cash is not a payment in respect of creditors rights.

14. Be careful of the TAAR

There is a TAAR that applies where the purpose or one of the main purposes of the arrangement is to secure a tax advantage by avoiding or minimising the effect of para.1 or 5. This should not catch arrangements where for example an individual borrows from a bank rather than using their own cash.

This list is far from exhaustive, and I will be returning to many of these points in greater detail over the coming months, but it does cover some of the big concerns for a non-domiciled investor considering their future IHT liability. The key as always is to be careful, thorough, and consistent, and check off all potential concerns well in advance.


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