Whether property transferred to a trust is excluded property

In the recent case of Barclays Wealth Trustees (Jersey) Ltd and another v HMRC [2015] EWHC 2872 the High Court considered whether cash proceeds of shares added to a trust were excluded property and therefore not subject to the ten yearly charge.

Property was transferred from one trust (Trust 1) to another (Trust 2).  Although both trusts were settled by the same settlor, Trust 1 was settled while the settlor was not domiciled nor deemed to be domiciled in the UK but Trust 2 was settled later at a time when he was deemed to be domiciled in the UK. As a result the property transferred from Trust 1 to Trust 2 lost its excluded property status. The property was transferred back to Trust 2 in the hope that it would reacquire its original excluded property status.

It was held that the property did not benefit from excluded property status when it was subsequently transferred back into Trust 1. In order for the property to benefit from excluded property status it is necessary under section 48(3)(a) IHTA 1984, for the settlor to be domiciled outside the UK  “at the time the settlement was made”. This requires considering the settlor’s domicile position each time funds are added into the trust rather than only at the time the original trust is settled. In this case, the settlor was deemed to be domiciled in the UK at the time the proceeds were transferred back into the trust and so the property does not qualify as excluded property.

This case highlights how complex the rules relating to excluded property and trusts can be. Many non-UK domiciled individuals – particularly those approaching 15 years of tax residence – may be considering settling ‘excluded property trusts’ in light of the recently announced changes to the taxation of non-UK domiciled individuals. Specialist UK tax advice should be sought before any transfers are made to or from such trusts.

For further information and help on how to advise your clients in relation to the above, please contact the TaxDesk on 0845 4900 509 and ask for Priya Dutta.