Commentary

I11.717 Property excluded from charge – acquisition of trust interests

IHT, trusts and estates

I11.717 Property excluded from charge – acquisition of trust interests

I11.717 Property excluded from charge – acquisition of trust interests

Background

IHT is charged by reference to a taxpayer's domicile. If a taxpayer is UK domiciled, their worldwide estate is subject to inheritance tax at death or on lifetime transfers. However, a number of specific statutory exemptions and reliefs mean that inheritance tax is often not charged on transfers of wealth. The most obvious is the exemption on transfers of property between spouses and civil partners. Another is the exemption on outright lifetime gifts to individuals provided the donor survives seven years and does not receive any benefit from the gifted property in the seven years prior to his death. Gifts into trust are generally taxed less favourably and in particular may be subject to an immediate entry charge of 20%.

On the other hand, if the taxpayer is neither domiciled nor deemed domiciled in any part of the UK, only transfers of assets situate in the UK are subject to inheritance tax (subject generally to the same exemptions as apply to a UK domiciliary). As far as settled property is concerned, if such property is situated outside the UK it is excluded from IHT if the settlor was not domiciled in any part of the UK when he made the trust. There are certain statutory exceptions to this (for example IHTA 1984, s 48(3A) or ss 81 and 82 that are not dealt with here).

The arrangements

A non-UK domiciled settlor settles £1m on trust for Y (often a company) such that

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