Writing for Taxation magazine’s Readers’ Forum, BKL tax consultant Terry Jordan responds to a reader’s query about an estate with an international dimension.
‘Our UK resident clients are the two trustees, and also the only beneficiaries of an interest in possession trust set up by their cousin Tony in his will, of which his former wife, Maria, was the life tenant. Tony was UK domiciled and resident and died in 2010. Maria, who died last month, having permanently left the UK five years ago, was non UK domiciled. The affairs of the trust are very straightforward; cash settled into it at the outset of some £900,000 was placed in a deposit account, generating modest interest income which was included in Maria’s UK tax returns each year.
The trust ceased on the death of the life tenant, and we are instructed to assist the trustees with the trust’s IHT affairs. Importantly, however, neither ourselves not the trustees are instructed by the overseas executors of Maria’s estate and in fact, there is no contact with Maria’s representatives. The trustees are still confident, having known Tony and Maria, that Maria had no UK assets at the time of her death.
We’ve considered the availability of the NRB and established the sum due in IHT in respect of the trust, which the trustees are ready to settle.
Our concern, however, lies at the admin side of things. Being realistic, my clients do not expect Maria’s offshore representatives to submit an IHT400 return; the representatives are based overseas and do not consider any UK obligations to apply to them, as there are no UK assets. At the same time, it is beyond the trustee’s capacity to step into the affairs of Maria’s estate. Our intention is to act within the scope of our instructions and only submit returns related to the trust (that is, IHT100, IHT100b and IHT418 as well as the supplementary forms) but we’re unsure whether HMRC can work with this approach and grant closure to the trustees.
What are readers’ experience of this?’ Query 20,167 – Tanya.
Terry Jordan’s reply: Submit the IHT returns as listed.
‘Tanya’s clients are the trustees and now absolutely entitled as the remaindermen under an immediate post-death interest trust (IHTA 1984, s 49A) set up by Tony’s will – who died domiciled and resident in the UK in 2010. The life tenant was Tony’s former wife Maria.
The scope of IHT is determined by a person’s domicile. As well as domicile at general law, it is necessary to consider the deeming provisions. A person who is domiciled outside the UK at general law will be deemed domiciled here if they have been tax resident for 15 out of the preceding 20 years and for at least one of the four tax years ending with the relevant tax year or if having acquired a domicile at general law elsewhere, they were domiciled within the UK in the previous three years before the relevant time. These were the two legs of s 267 now including a provision that catches ‘returners’: UK residents who were UK born with a UK domicile of origin.
In the case of settled property, what matters is the domicile of the settlor when the settlement commenced and when any additions were made. Provided the settlor was not domiciled or deemed domiciled non-UK situs assets, units trusts and OEICS will be excluded property outside the scope of IHT. Since Tony was UK domiciled when he died, on the face of it the trust property could not be excluded. However, we are told that Maria was not domiciled within the UK when she died, and she was non-resident. Had the trustees invested in certain gilts they could have avoided IHT on Maria’s death under s 6 (2) and s 48 (4). Alternatively, had the trust been broken by an outright appointment to Maria while she was alive the value in her hands could have been excluded property as non-UK situs (albeit the assets would then possibly not have passed to Tony’s cousins on her death).
Maria’s NRB (and possibly all or a proportion of Tony’s) would be available to the trustees on the basis that Maria’s free estate was entirely comprised of excluded property as non-UK situs. My advice would be to submit the IHT returns as listed with an explanation of the circumstances regarding Maria’s domicile and her free estate.’
The full article is also available on the Taxation website.
Our private client tax team have expertise in a range of areas including trusts, IHT, wills and probate. They also have specialist experience advising non-resident and non-domiciled clients. For more information, please get in touch with your usual BKL contact or use our enquiry form.