Over the past few weeks, I have been considering whether offshore trusts
offer any advantages to the UK taxpayer over the homegrown version.
After looking at this issue in connection with capital gains tax,
especially in light of the anti-avoidance provisions in this year's Budget,
I will turn to the issue of inheritance tax.
When it comes to looking at offshore trusts in connection with inheritance
tax, it must be noted that if a settlor is non-UK domiciled at the time he
makes a transfer of property into the trust, regardless of the residence of
the trust, then, provided the trust property is non-UK-situs property, it
will forever be excluded property.
So, from an IHT standpoint, the non-UK-resident status of the trustees
does not help the non-UK domiciliary. This is equally true for the UK
The statutory justification for this is S48(3)(a) IHTA 1984 which provides
that, where property in a trust is situated outside the UK – but not a
reversionary interest in the property – it is excluded property unless the
settlor was domiciled in the UK at the time the settlement was made.
This means that property in the trust is not subject to IHT at any time
while it remains non-UK sited, regardless of the subsequent domicile of the
This is clearly a very important consideration as it confers a permanent
exemption from IHT irrespective of the subsequent history of the trust,
provided the property itself is situated outside the UK.
S44(1) IHTA 1984 provides a wide definition of settlor to include “any
person by whom the settlement was made directly or indirectly and in
particular (but without prejudice to the generality of the preceding words)
includes any person who has provided funds directly or indirectly for the
purpose of or in connection with the settlement or has made with any other
person a reciprocal arrangement for that other person to make the
Where this definition produces more than one settlor, the part provided by
each can be treated as a separate trust. This will catch arrangements where
there is a dummy settlor and, subsequently, other property finds its way
into the trust.
The situs of property is a question governed by private international law.
Despite this, in most cases, the situs of the property will be obvious.
Company shares are sited where the register is kept and life insurance
policies, being debts, are sited where the life company is resident or, if
the policy is issued under seal, where the policy is physically situated.
Reversionary interests are usually excluded property. Reversionary
interests are defined under S47 IHTA 1984 as “future interests under a
settlement, whether vested or contingent”.
If a reversionary interest is not already excluded property under the
general rule of S48(1) IHTA 1984, it may still be excluded property if the
person beneficially entitled to it is an individual domiciled outside the
Reversionary interests in settled property situated outside the UK are
prevented from being excluded property under S48(3)(a) IHTA 1984 but are
brought back in as excluded property by S48(3)(b) IHTA 1984, which provides
that S6(1) IHTA 1984 applies to a reversionary interest in the property but
does not otherwise apply in relation to the property.
S6(1) provides that property situated outside the UK is excluded property
if the person beneficially entitled to it is an individual domiciled
outside the UK. Therefore, for a reversionary interest in foreign property
to be excluded property, the individual reversioner must be domiciled
outside the UK.
S218 IHTA 1984 imposes a liability on any person, other than a barrister,
who has been concerned with the making of a trust in the course of his
trade or profession and knows or has reason to believe that the settlor was
domiciled in the UK and that the trustees are not or will not be resident
in the UK, to report this to the Inland Revenue within three months of the
creation of the trust with the names and addresses of the settlor and
For the purposes of the provision, trustees of a settlement are regarded
as not resident in the UK unless the general administration of the
settlement is ordinarily carried on in the UK and the trustees or a
majority of them (and, where there is more than one class of trustees, a
majority of each class) are for the time being resident in the UK.
Failure to comply carries a penalty of £300 plus £60 per day if it
continues after it has been declared by a court or the Special
Commissioners. A reasonable excuse defence is provided in S245A(5) IHTA
The requirement to provide information in this way is important in
alerting the Revenue to the existence of such trusts. It does not apply to
will trusts or to a trust where an account has been delivered to the
Revenue under S216 IHTA 1984.