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Capital Tax Review by Matthew Hutton MA, CTA (fellow), AIIT, TEP

Matthew Hutton MA, CTA (fellow), AIIT, TEP considers an important inheritance tax issue for individuals who are not domiciled in the UK.

Context

The issue is the IHT status of non-UK property within a settlement made by someone both actually and deemed domiciled outside the UK in which he reserves a benefit, dying at a time when he has become actually or deemed domiciled in the UK (without releasing the benefit). Do the excluded property rules in IHTA 1984, s 48(3) take priority over the GWR rules in FA 1986, s 102(3)?

What was then para D8 of the Inland Revenue Advanced CTO Instruction Manual (now para IHTM 13496 of the Inheritance Tax Manual) had been changed by the end of 2001. The previous example was as follows:

'The donor, who is domiciled in Australia, puts foreign property into a discretionary trust under which he is a potential beneficiary. He dies five years later domiciled in England and without having released the reservation. The property is property subject to reservation and is therefore deemed to be part of the donor's death estate. However, as he was domiciled outside the UK at the time the settlement was made, the property will be excluded property, under IHTA 1984, s 48(3), if still situate outside the UK at the date of death.' The change made by the beginning of 2002 (though I am not quite sure when) replaced the final sentence with 'Any cases where this is the situation must be referred to the litigation team' or, as now appears, 'Refer any cases where this is the situation to Litigation (IHTM 01083)'.

The impact of IHTM 14396

The change notwithstanding, HMRC Capital Taxes are still generally thought to give priority to excluded property. This has been confirmed by a posting on the Trusts Discussion Forum. Paul Kennedy wrote to HMRC in November 2005 asking for confirmation of current practice. The reply in writing was that the longstanding position (as described in para 7 of the Law Society’s Gazette on 10.12.86) would remain the current view of HMRC unless and until they were to issue advice to the contrary.

Of course, the warning is made that if the property were to cease to be subject to a reservation before the end of the relevant period, HMRC could still pursue a claim for a deemed PET which had become a chargeable transfer under FA 1986, s 102(4).

(Trusts Discussion Forum, posting by Paul Kennedy of Prudential on 4.8.06)

Comment

It is good to have recent official confirmation from HMRC. But anyone dealing with excluded property settlement de novo needs to warn clients of the sword of Damocles hanging over them, though there is no knowing when or even if when it might fall. It will be interesting to see what if anything emerges from the 2003 Review of Residence and Domicile. Meanwhile, with existing excluded property settlements where the settlor or spouse has an interest in possession, there is an urgent need to advance an interest in possession for some other beneficiary before such a settlor or spouse either dies or requires a deemed domicile in the UK, given the FA 2006 reforms.

Matthew Hutton MA, CTA (fellow), AIIT, TEP

More Information

The above article has been taken from Matthew Hutton’s Capital Tax Review, a quarterly update for professional advisers of private clients. For more information, visit http://www.taxationweb.co.uk/books/capital_tax_review.php.