Setting up an excluded property trust to reduce UK tax - USERNAME: Bob1 - 17/09/2012
Tax Question:
Hi,
My wife and I are UK resident and non domiciled and will become UK deemed domiciled for inheritance tax purposes in a few years time.
We are considering setting up a discretionary excluded property trust primarily for inheritance tax protection of our foreign assets. However we would like to be able to liquidate the trust if we decide to leave the UK. Three questions:
1] I understand that we could set up a UK resident or a UK non resident trust. What are the relative advantages and disadvantages?
2] Are the assets placed in the trust subject to capital gains tax when setting up the trust ? Can this be avoided by paying the remittance charge and selecting the remittance basis of taxation?
3] If we left the UK we would probably want to liquidate the trust. Does this mean that we or the trust are exposed to capital gains tax? Is this influenced by the choice of a UK resident or non resident trust or by our residence location at the time of liquidation?
Bob
Answer:
1] I understand that we could set up a UK resident or a UK non resident trust. What are the relative advantages and disadvantages?
If you set up a UK resident trust the trust assets would be subject to the IHT regime for trusts (10 yearly charges and exit charges). In addition the trust would be subject to CGT and income tax on the trust gains/income.
If you set up a non resident trust which held foreign assets it would not be subject to UK IHT if you were non domiciled at the date of the creation. The trust itself wouldn't be subject to CGT or income tax on foreign assets.
2] Are the assets placed in the trust subject to capital gains tax when setting up the trust ? Can this be avoided by paying the remittance charge and selecting the remittance basis of taxation?
Yes if there were gains on the assets when transferred in these would be subject to CGT unless they were foreign assets being transferred into a foreign trust and you claimed the remittance basis.
3] If we left the UK we would probably want to liquidate the trust. Does this mean that we or the trust are exposed to capital gains tax? Is this influenced by the choice of a UK resident or non resident trust or by our residence location at the time of liquidation?
If the trust was a non resident trust holding foreign assets there should be any CGT on the trust if it sold trust assets or transferred them to you when you were non resident.
About the Author
The Author of this article/answer is our site Editor, Lee Hadnum. Lee is a rarity among tax advisers having both legal and chartered accountant qualifications. After qualifying a prize winner in the Institute of Chartered Accountants exams, he also went on to become a chartered tax adviser (CTA).He worked in Ernst & Youngs Entrepreneurial Services department for a number of years before setting up his own tax planning practice. He is now a full time tax author.
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