Writing for Taxation magazine’s Readers’ Forum, BKL private client tax specialist Terry Jordan answers a query involving inheritance tax (IHT) on a non-resident trust, also involving UK property, multiple settlors interest and the death of one of the two settlors.
The tax query
‘A non-resident trust with two settlors (husband and wife) hold a few UK properties along with some foreign assets.
The settlors are British but have been non-resident for several years. The trust was settled on 30 March 1995 as a discretionary trust when the settlors were non-resident. Both the settlors are the named beneficiary of the trust. Sadly, one of the settlors died on 15 January 2025.
A few questions/dilemmas arise:
- I assume these are treated as two settlements with two nil rate bands available?
- It is not clear whether it is treated as a settlor interest trust as when the trust was settled, the settlors were non-resident in the UK?
- I assume the ten-year anniversary charge is applicable and the period prior to April 2017 needs to be excluded in the computation.
- How is IHT calculated on the settlor’s death assuming the trust’s UK property is included in their estate?
- Might there be any relief on the IHT ten-year charge for potential double taxation on the basis of point 3 and 4 or vice versa and how would the relief be made available?
It looks like a simple arrangement, but that complexity arises due to UK property, multiple settlors interest and a death of one settlor just prior to the ten-yearly charge period.
What do readers think?’ Query 20,560– Dahlia.
Terry Jordan’s reply: There are two settlements with two nil rate bands.
‘Dahlia has omitted a rather important piece of information being the domicile of the settlors when they created the non-resident trust in 1995. We are told that they were then non-UK resident and apparently remain so with one dying in January this year. Both are named beneficiaries of the trust.
1. Yes, treated as two settlements for inheritance tax purposes in view of IHTA 1984, s 44(2). Yes, two nil rate bands provided neither settlor had any chargeable transfers on their clocks on the eve of the settlement commencing.
2. The settlement was apparently settlor-interested for income tax purposes throughout and until 5 April 2008 for capital gains tax purposes when TCGA 1992, s 77 was abolished. The settlors were also within the gifts with reservation provisions for IHT except to the extent that the trust assets comprised excluded property. (HMRC now accepts that excluded property ‘trumps’ the GROB provisions.) If the settlors were non-UK domiciled in 1995 then non-UK situs assets and, from 15 October 2002, holdings in authorised unit trusts and shares in open-ended investment companies would have been excluded property. The UK properties would have been within the scope of IHT throughout unless they were enveloped in a non-UK company.
3. Ten-year IHT charges apparently arose in 2005 and 2015 as well as earlier this year. April 2017 would only be relevant if the UK properties had been enveloped as that is when IHTA 1984, Sch A1 came into force.
4. FA 1986, s 102(3) deems the whole value of the settlement to be part of the settlor’s estate on death unless the settlor was non-UK domiciled in 1995 in which case the charge would be limited to UK situs assets and if relevant the value of enveloped UK residential property.
5. I cannot see that the Inheritance Tax (Double Charges Relief) Regulations 1987 are in point here to provide relief.
For completeness, if the surviving settlor remains non-UK resident the charge on his or her death would be limited to UK situs property in view of IHTA 1984, s 48 (3).’
The full article was published in Taxation magazine (issue 4996) and is available to subscribers here on the Taxation website.
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