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Inheritance tax – property comprised in settlements

Posted on 12th March 2020

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As previously announced, the government have confirmed that legislation will be enacted in Finance Bill 2020 to make changes to the inheritance tax treatment of property added to or transferred between settlements where the settlement was originally made when a person was not UK domiciled, but was UK domiciled at the time of the property addition or transfer.

The current treatment of excluded property in a trust for Inheritance Tax purposes provides that where property comprised in a settlement is situated offshore that property will be excluded property unless the settlor was domiciled in the UK at the time the settlement was made. There are also rules relating to property transferred between trusts regarding the excluded property treatment of such property.

Excluded property is effectively not brought within the Inheritance Tax charge.

The case Barclays Wealth Trustees (Jersey) Limited & Michael Dreelan v HMRC established that it was the domicile of the settlor at the time the settlement was establish that was relevant, not the domicile of the settlor at the time of the subsequent events.

The legislation that will be introduced amends the Inheritance Tax Act so that, where property is added to a settlement, the domicile of the settlor will be considered for the purposes of the excluded property rules at the time of the addition rather than at the time the settlement was first created. In addition the proposed legislation will introduce new tests to determine whether property transferred between trusts is excluded property which focus on the domicile status of the settlor at the time of the transfer too.

Trustees should consider carefully any future transactions to ensure that any settlement with “protected status” is not effected by any subsequent property transactions.

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