An Excluded Property Trust (EPT) helps people living in the UK but not domiciled there to protect their overseas assets from UK inheritance tax. This trust keeps foreign investments outside the grasp of the UK tax man. In this article we’ll explain how EPTs work and the benefits.
Key Points of an Excluded Property Trust
- Excluded Property Trusts (EPTs) protect non-UK assets from UK inheritance tax for individuals not domiciled in the UK, so you can still control and have flexibility over these assets.
- Setting up an EPT requires a trust deed and adhering to the rules to maintain tax exempt status, particularly around the settlor’s domicile.
- EPTs offer big inheritance tax benefits by keeping trust assets outside the settlor’s estate and can reduce tax liabilities if managed correctly and in accordance with the trust terms.
What are Excluded Property Trusts
An Excluded Property Trust (EPT) is a planning tool for clients who are living in the UK but not yet domiciled here. The main purpose of an EPT is to keep non-UK assets out of the UK inheritance tax net. This type of trust is great for individuals who want to protect their overseas investments so these assets remain outside the UK inheritance tax regime.
The beauty of EPTs is the flexibility and control. While the assets are protected, the settlor (the person who is setting up the trust) has full access to the trust fund and can appoint beneficiaries as they wish. A corporate trustee can manage the trust assets, ensuring compliance with legal requirements and providing professional management. So even if the settlor becomes domiciled in the UK, the trust assets, if outside the UK, will remain inheritance tax free forever.
To maintain the excluded property status the trust must follow certain rules. For example, once the settlor becomes UK domiciled they should not add new assets to the trust as this could lose the tax exempt status. Placing assets into an EPT creates settled property, which affects the tax treatment of these assets. Understanding these rules allows you to use EPTs to protect your wealth.
Setting up an Excluded Property Trust
Setting up an Excluded Property Trust involves a series of legal steps, starting with the creation of a trust deed. This is the foundation of the trust and sets out the terms and conditions of the trust. New EPTs should have both the bond application and the trust deed dated the same day to ensure compliance and management. Certain transfers into the trust may require the settlor to pay inheritance tax, depending on the value of the assets.
If you are transferring an existing offshore bond into the trust the process is slightly different. The trust deed should be dated on the last signature of the signing parties to match the bond applications and meet all legal requirements.
The role of the trustees is also important in the setup process. Trustees manage the trust assets and ensure the trust is used for its intended purpose. Follow these steps and you’ll have an EPT that protects your assets from UK inheritance tax. The value of the assets transferred into the trust can impact the settlor’s estate for inheritance tax purposes.
EPT Benefits
The benefits of EPTs are many. One of the biggest is to keep foreign assets out of UK inheritance tax even if the settlor becomes UK domiciled. This applies to all types of overseas investments so non-UK domiciled individuals can manage their assets without worrying about UK tax.
Another big benefit is the assets in the EPT are outside the settlor’s estate for tax purposes on their death. This means they are not subject to UK inheritance tax and a big financial advantage for the beneficiaries. However, the upcoming shift to a residence-based regime for Inheritance Tax in April 2025 may affect the benefits of EPTs for non-domiciled individuals.
EPTs also offer investment flexibility. For example, holdings in Authorised Investment Funds can be included, potentially qualifying as excluded property and further reducing tax. These benefits make EPTs a great option for individuals who want to protect their wealth.
Domicile for Inheritance Tax Purposes
Domicile is a key factor in determining an individual’s inheritance tax liability. Unlike residency which is where you live, domicile is where you consider your permanent home and your intention to remain there indefinitely. For inheritance tax purposes this means UK inheritance tax applies globally based on domicile not residency.
Individuals can be deemed domiciled in the UK if they have been UK resident for at least 15 of the last 20 tax years. This deemed domicile status has a big impact on their tax obligations and can bring worldwide assets within the scope of UK inheritance tax. But some countries like France and Italy have double tax treaties with the UK that can prevent individuals from being deemed domiciled.
Non-UK domiciled individuals can use EPTs as a way to reduce inheritance tax and protect overseas assets from UK tax. Understanding domicile and its implications allows individuals to make informed estate planning decisions.
Access to Trust Funds
Control and access to trust funds are key to managing an EPT. Trustees have the authority to manage the trust assets so beneficiaries don’t have automatic rights to the funds. This ensures the trust operates as intended and in accordance with the trust deed.
Trustees can delegate investment powers to professional asset managers so the trust assets can be managed by experts. This delegation helps to grow and maintain the trust fund and ensure the assets are managed wisely.
Access to the trust funds is discretionary and managed by the trustees. Beneficiaries can only receive funds at the trustees’ discretion and can’t demand funds from them. This discretionary trust nature of fund distribution ensures the trust remains on purpose and provides an asset protection mechanism.
Inheritance Tax
The inheritance tax implications of setting up and running an EPT are big. One of the main benefits is an EPT can keep trust assets out of inheritance tax as long as the settlor is non-UK domiciled at the time of the asset transfer. This is a big deal for individuals who want to protect their wealth from UK tax.
To exclude non-UK assets from inheritance tax certain conditions must be met including the settlor being foreign domiciled and not being deemed UK domiciled after 15 tax years. If these conditions are met the assets in the trust will be outside of UK inheritance tax.
If the settlor becomes UK domiciled they should not add new assets to the trust to maintain the tax free status. The new residency rules for inheritance tax will apply to trusts set up by non-UK domiciled settlors from 6 April 2025. Understanding these rules and conditions is key to effective estate planning and inheritance tax reduction.
Transfers into and out of Trust
Transferring assets into and out of a trust can have significant implications for inheritance tax (IHT) purposes. When assets are transferred into a trust, the settlor may be subject to IHT charges, depending on the type of trust and the value of the assets being transferred. For instance, if the value of the assets exceeds the nil-rate band, the excess amount may be subject to an immediate IHT charge at 20%. This is particularly relevant for discretionary trusts, where the tax implications can be more complex.
Conversely, when assets are transferred out of a trust, the beneficiaries may also face IHT charges. The tax liability depends on the value of the assets being transferred and the tax status of the beneficiaries. If the assets have appreciated in value while in the trust, the beneficiaries might be liable for capital gains tax as well. It’s crucial to plan these transfers carefully to minimize tax liabilities and ensure compliance with the UK IHT regime.
Understanding the tax implications of these transfers is essential for effective estate planning. By strategically managing the timing and value of asset transfers, you can optimize the tax benefits of your EPT and protect your wealth for future generations.
EPTs Upon Death
Upon the settlor’s death the trust assets will typically stay outside the settlor’s estate if they remain within the trust. So the assets will not be subject to UK inheritance tax and will be a big financial protection for the beneficiaries.
To ensure the EPT remains excluded property and avoids inheritance tax the trustees must manage the trust as per the terms and conditions of the trust. This careful management is key to preserving the benefits of the trust and the assets after the settlor’s death.
Dealing with a Trust when Someone Dies
When someone dies, managing their estate often involves dealing with trusts. The deceased may have specified that their assets be placed into a trust upon their death, or part of their estate may already be held in a trust. This can add a layer of complexity to the estate administration process.
If the deceased had an EPT, the trust assets typically remain outside their estate for inheritance tax purposes, provided the trust was set up correctly and the rules were followed. This means the assets in the trust are not subject to UK inheritance tax, offering significant financial protection for the beneficiaries.
The trustees play a crucial role in this process. They must ensure that the trust is managed according to the terms set out in the trust deed and that the assets are distributed in line with the deceased’s wishes. This may involve making decisions about how and when to distribute the trust funds to the beneficiaries.
In some cases, the deceased may have set up multiple trusts, each with different terms and conditions. This requires careful coordination to ensure that all trusts are managed effectively and in accordance with the law.
Dealing with trusts when someone dies can be complex, but with careful planning and professional advice, it is possible to navigate this process smoothly and ensure that the deceased’s wishes are honored while minimizing tax liabilities.
Case Studies and Examples
Real life examples show the practical benefits of Excluded Property Trusts. In one case trustees borrowed £1 million against a UK residential property valued at £1.5 million to buy a second UK property. Initially the liability was deductible but would be disallowed if the property was sold and the proceeds moved offshore.
Another example was trustees borrowing funds to buy foreign shares using the proceeds of a UK property sale. This resulted in partial disallowance of the liability because of the nature of those investments. These examples illustrate the complexities and strategy involved in running an EPT.
Florence’s case shows that borrowing against UK property to buy foreign property results in disallowance of any liability linked to that foreign property for UK tax purposes. These case studies show the strategy of using EPTs for asset protection and tax reduction.
Conclusion
In summary EPTs are a powerful way to protect your wealth from UK inheritance tax. By understanding how to set up and run EPTs and the importance of domicile status you can protect your overseas assets. EPTs offer flexibility, control and big tax benefits so make sure you consider EPTs to preserve your wealth for future generations.
FAQs on Excluded Property Trust
What is an EPT?
An EPT is a legal structure that excludes non-UK assets from UK inheritance tax for individuals living in the UK who are not UK domiciled. This means it preserves wealth for beneficiaries outside of UK tax.
How does domicile status affect inheritance tax?
Domicile status has a big impact on inheritance tax, those deemed UK domiciled are liable for inheritance tax on their worldwide assets. So understanding your domicile status is key for tax planning.
Can I add new assets to my EPT after I become UK domiciled?
You can’t add new assets to your EPT after you become UK domiciled or it will risk losing the tax exempt status and trigger inheritance tax.
Who controls the trust funds in an EPT?
Trustees control the trust funds in an EPT and beneficiaries get funds at the trustees’ discretion.
What happens to the trust assets upon the settlor’s death?
Upon the settlor’s death the trust assets will typically stay outside their estate if they remain within the trust so will avoid UK inheritance tax. This keeps the trust intact and protects the assets for the beneficiaries.
