Well advised non-doms know that UK situated assets should never be directly held by their offshore discretionary trusts. To do so would subject the offshore trust to periodic charges to UK Inheritance Tax (IHT). These charges comprise the entry charge, the ten year anniversary charge, and exit charges, where value leaves the trust after creation.
To avoid these charges arising, it has been commonplace for UK situs assets, such as UK real estate, to be owned by an offshore company, which in turn is wholly owned by an offshore trust. The trust’s asset is the shares in the offshore company – non-UK situs, so the trust is not subject to periodic IHT charges as it does not directly own UK situated assets. As a result, many non-doms have no understanding of what periodic charges are and when they apply. However, if the Government’s proposals in their August Further Consultation come to pass, ignorance of IHT periodic charges could cost non-doms and their offshore trusts.
With the proposed move towards transparency, for IHT purposes, of offshore structures owning UK real estate from April 2017, non-doms owning UK residential property where a trust is involved in the structure will suddenly find, in many cases for the first time, that the periodic charges to IHT will start to bite on their trust. Advisers need to help their non-dom clients to prepare for this change and to consider whether any reorganisation of the trust structure needs to take place before April 2017, while the trust’s shares in offshore companies owning UK residential property remain ‘excluded property’ for IHT purposes.
If a ten year anniversary charge falls on or after 6 April 2017, the charge will take into account (among other things):
- the settlor’s history of chargeable transfers in the seven years prior to the trust commencing (note that anyone adding property to a trust could constitute a settlor for UK tax purposes);
- the value of any property (other than excluded property, which has remained excluded property throughout) in a related settlement (i.e. a settlement created on the same day by the same settlor) on the day that the settlement was created; and
- the value of transfers giving rise to an exit charge in the previous ten years.
Fortunately, due to a change in the law enacted in the Finance (No. 2) Act 2015, excluded property held in an offshore trust which has always been excluded property will no longer be taken into account when calculating the ten year anniversary charge due on relevant property.
The charge is, at most, 6%. The rules of the calculation differ if the trust was created before March 1974 or there have been additions to the trust since its creation.
Trustees of trusts created in years ending -7 (after 6 April in that year) and -8 should continue to monitor developments carefully, as they will have to get to grips with the new regime and reporting requirements almost immediately. Trying to gather the necessary information, some of which may be very historic, may prove to be time consuming.
IHT periodic charges only apply to settlements for IHT purposes – offshore companies are not subject to periodic charges. Ensuring that offshore trusts do not indirectly or directly hold UK residential property after 5 April 2017 will prevent periodic charges applying.