Q&A excluded property trusts
Sheltering assets
This month our expert panel looks at the excluded
property trust mechanism and whether it can help
a UK-resident Spanish national mitigate their
inheritance tax liabilities
Does an excluded property
trust work in Spain
regarding Spanish taxation
for a UK resident
(that is, a Spanish
national who is looking
to retire to Spain) who is
non-domiciled?
Simon Wyatt, chartered
financial planner, Palmer
Lane Wyatt, Cardiff
Deborah Moon, technical
manager, Scottish Provident
International Life Assurance
The concept of excluded
property is unique to the
UK inheritance tax (IHT)
regime. A foreign national
who has been living in the
UK for 17 of the previous
20 tax years will be treated
as being domiciled in the
UK for IHT, regardless of
whether they retain their
domicile of origin under
the general law.
As a consequence, their
worldwide assets will
potentially become liable
to UK IHT rather than only
their UK assets. But until
that limit is breached, any
property outside the UK is
considered excluded property
for the purpose of UK
IHT. One way to prevent
assets falling within the
scope of UK IHT is to
create a trust to hold that
excluded property before
the deadline.
Typically, product providers
will have a suitable
trust that can provide this
protection in respect of an
offshore bond. But if assets
other than bonds are held
offshore, an investor will
need to take appropriate
legal and tax advice and
perhaps create trusts to
safeguard all their other
offshore wealth – such as
property, business interests,
investments and so on
– from UK IHT as well.
Excluded property trusts
are generally (although not
exclusively) settler-interested
trusts: trusts under which
the settler can benefit.
This question relates to
Spanish IHT and, since this
is only assessable on
Spanish-situated assets, any
asset held outside Spain,
such as a bond issued from
a jurisdiction outside both
the UK and Spain (whether
held subject to an excluded
property trust or otherwise),
would not be liable
for Spanish IHT.
Conversely, a Spanish
property held subject to an
excluded property trust for
UK IHT purposes would
not escape liability for
Spanish IHT.
It is unlikely that an
excluded property trust created
by a Spanish national
who returns to Spain to
retire will provide any protection
from either income
and/or wealth taxes.
It has been reported
Spanish prime minister Jose
Luis Rodriguez Zapatero
has approved a raft of
measures aimed at boosting
the economy, including the
abolition of IHT. The
Spanish parliament does
not yet appear to have
approved this measure, but
should they do so, the
answer to this question will
change – for the better.
Kevin Dean, chief executive,
Axa Isle of Man
An excluded property trust
has specific meaning within
the UK tax system. It allows
a non-domiciled individual
to settle into trust non-UK
located (or sourced) property
and keep this outside
their estate for UK IHT
purposes.
This means that if the
non-domiciled individual
becomes UK-domiciled in
future, the trust assets will
be excluded from UK IHT,
december 2008 [www.international-adviser.com] INTerNATIONAL AdVISer
technical
hence the term excluded
property trust.
A UK-domiciled individual
will pay IHT on their
worldwide assets on death,
while a non-domiciled individual
will only pay UK IHT
on UK located assets. But,
importantly, under UK law
a person becomes deemed
UK-domiciled if they have
been UK-resident for at
least 17 out of the past 20
years of assessment. If they
are deemed UK-domiciled,
they will be treated, for IHT
purposes only, in the same
manner as a person with a
UK domicile of origin.
An excluded property
trust is designed to mitigate
UK IHT; but the trust itself
– or indeed any trust – may
still help to shelter the trust
assets from Spanish succession
tax should they
move to Spain in the future.
Lifetime gifts or transfers on
death to a non-Spanish resident
are generally not subject
to Spanish succession
tax. But transfers on death
to Spanish residents will
usually be subject to succession
tax in most provinces
of Spain, even a transfer
of non-Spanish assets.
If you have a question for
the tax panel, please email
dan.judge@lastwordmedia.com
The opinions expressed are those of the
author/panel. The material is for general
information only and does not constitute
investment, tax, legal or other form of advice.
You should not rely on this information to
make (or refrain from making) any decisions.
Always obtain independent, professional
advice for your own particular situation.
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