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HMRC internal manual

Inheritance Tax Manual

Foreign property: property excluded from Inheritance Tax: foreign settled property with non-UK domiciled settlor

IHTA84/S48 (3) and IHTA84/S80 to 82 mean that property situated abroad and held in a settlement is excluded property unless the settlor was domiciled (IHTM13000) in the UK at the time the settlement was made.

The position may be different where the gift with reservation rules (IHTM14396) apply.

In the case of property settled by Will, or under the rules of intestacy (IHTM12000), the date of settlement will be the date of the testator’s or intestate’s death. This does not apply to a reversionary interest in that settled property (IHTM27230).

There are additional requirements for settlements without interests in possession or discretionary trusts that fall within certain anti-avoidance provisions (IHTM27247). So, you will need to determine:

  • whether a settlement is a non-interest in possession or discretionary trust for IHT purposes and,
  • if so, whether the additional requirements are relevant and (where appropriate) satisfied.

If you are unsure seek advice from Technical.

Once you have determined that any property held in a settlement is excluded property:

  • IHTA84/S53 (1), - you must not tax that property on the termination or coming to an end of an interest in possession in the property
  • IHTA84/S58 (1)(f) and 70(7), - if the trusts applying to the property are discretionary you must disregard that property for the period(s) when it was excluded property when determining the rate of any discretionary trust charge.
  • IHTA84/S48 (3), - The legislation refers to the settlor’s domicile ‘at the time the settlement was made’. You must proceed on the basis that, for any item of property held in a settlement, the settlement was made when that property was put in the settlement. Consult Technical if this view is challenged.

Example 1

Sean, when domiciled abroad, creates a settlement of a house in Spain. Later he acquires a UK domicile and then adds some Australian property to the settlement.

The Spanish property is excluded property because of Sean’s overseas domicile when he settled that property. But, the Australian property is not excluded property as Sean had a UK domicile when he added that property to the settlement.

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Example 2

Stella, when domiciled in Germany, puts a house in Germany and some securities that are situated in the UK at that time into a settlement for Xavier for life with remainder to Yolanda. On Xaviers’s death - the potentially chargeable event - the settled fund consists of:

  • Option 1, a villa in Spain, or
  • Option 2, land in the UK, or
  • Option 3, a house in Spain and some English securities.

In Option 1, the villa is excluded property even though it partly represents the proceeds of what was previously UK property (the securities). The land in Option 2 is not excluded property although it is partly derived from the German realty. In Option 3 the house is excluded property but the securities are not.

As a general rule property settled by a UK domiciliary is not excluded property - so it is within the scope of IHT - regardless of the locality of the property. This is the case even if any person entitled to an interest in possession in the property (who is treated under IHTA84/S49 (1) as being beneficially entitled to the property) is domiciled abroad. The only possible exception is that a double taxation convention overrides this rule. Refer any such claim to Technical.

You should also refer to Technical any claim that ‘proper law’ overrides this general rule IHTA84/S158 (1) and (6).