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HMRC internal manual

Inheritance Tax Manual

Foreign Property in a trust: when is foreign property excluded property?

In order to qualify as excluded property (IHTM02451) there are two tests, both of which must be satisfied:

  1. The settlor must have been domiciled outside the UK at the time the settlement was made (or at the date of any additions, if the added property is material). (IHTM13000) Deemed domicile under IHTA84/S267 applies for this purpose. (IHTM13024)
  2. The property in question must be situated outside the UK (IHTM27071) at the date of the charge to IHT.

This provision does not apply to a reversionary interest in the property, in which case it is the domicile of the current owner of that interest that is in point.

In addition, it became clear that UK-domiciled individuals were exploiting this exemption by purchasing interests in pre-existing trusts originally settled by non-UK–domiciled settlers. IHTA/S48 (3B) was introduced by the Finance Act 2006 to prevent this. This provides that property is not excluded property if:

  • An individual is, or has been, beneficially entitled to an interest in possession in the property at any time
  • The individual is, or was, domiciled in the UK at the time, and
  • Their entitlement arose directly or indirectly as a result of a disposition for consideration in money or money’s worth made on or after 5 December 2005.

It does not matter whether the consideration was given by the individual with the interest in possession or by someone else; and cases in which an entitlement arose indirectly include entitlements arising under a will or the law relating to intestacy.