IHTM42603 - Foreign element: additional test of domicile
Where an overseas domicile is claimed and IHTA84/S80 or S81 is in point, and it is claimed that property is excluded under IHTA84/S48 you must apply a double test of domicile
The statutory rules are set out in IHTA84/S82A1B, S82 and S82A, and you may need to test the domicile of more than one person or the domicile of the same person on different dates.
A: When IHTA84/S80 applies
When IHTA/s80 applies then the Act provides for a deemed settlor and a deemed trust with a deemed commencement date (IHTM42231)
If the settlor of the deemed trust is domiciled in the UK (or deemed to be domiciled in the UK) at the deemed commencement date, then the foreign assets in the trust cannot be excluded property in the first place.
However, if that settlor is not domiciled in the UK at the deemed commencement date then the foreign assets in the deemed trust can only be excluded property if an additional test is met.
The additional test is that the settlor of the original trust must be domiciled outside the UK when the assets became comprised in the original trust.
In summary, excluded property can only be available if both the original settlor and the deemed settlor were non-domiciled.
These rules were not altered by Finance Act 2020.
Example
In 2001 Mr and Mrs A were not domiciled in the UK and neither were born in the UK. Mr A created a trust that provided for an interest in possession for himself for life and then to his surviving spouse following which the trusts were discretionary for the wider family.
Mr A died in 2012 and Mrs A died in 2019 by which time she had become deemed UK domiciled. On both deaths the assets were outside the UK and excluded property.
However, following Mrs A’s death IHTA/S80 applies and a deemed settlement arises. The assets in the trust can no longer be excluded property and will be subject to a ten year anniversary (TYA) charge in 2021.
On the other hand, if Mrs A had continued to be domiciled outside the UK then the foreign assets will continue to be excluded property because the original settlor (Mr A) was non-domiciled when the assets became comprised in the original trust.
B: When IHTA84/S81 applies
When IHTA/S81 applies then assets in a trust (‘T1’) that become comprised in another trust (‘T2’) are deemed to remain in T1 for the purpose of calculating Inheritance Tax (IHT) trust charges (IHTM42229) But when that happens the availability of excluded property status may be denied.
If the settlor of T1 was domiciled in the UK (or deemed to be domiciled in the UK) when the assets become comprised in T1 then the foreign assets in the trust cannot be excluded property in the first place.
However, if the settlor of T1 was not domiciled in the UK when the assets originally became comprised in T1 then the transferred assets (which are deemed to remain in T1) can only continue to have excluded property status if an additional domicile test is met.
The additional domicile test depends upon the time when IHTA/s81 applies, i.e. the assets in T1 become comprised in T2.
- IHTA/S81 transfers prior to 22 July 2020
The additional test is that the settlor of T2 must also have been non-domiciled at the time the assets in T2 originally became comprised in T2 (IHTA/S82).
Put simply, excluded property status can only be available for the transferred assets if the settlors of both T1 and T2 were historically non-domiciled.
- IHTA/S81 transfers on or after 22 July 2020 (Finance Act 2020)
The deeming effect of IHTA/S81 remains but the additional domicile test is different and is set out in the new IHTA/S82A.
The new legislation no longer depends on the domicile of the settlor of recipient trust (T2). Instead the additional domicile test focuses on the domicile of the settlor of T1 or the domicile of the person that caused the assets to become comprised in another trust.
- The trustees use their trust powers to transfer assets from T1 to T2
In this case the transferred assets can only continue to have excluded property status if the settlor of T1 is not domiciled in the UK at the time the assets are transferred to T2.
If further transfers are then made from T2 to T3 or from T2 back to T1 then these are labelled as ‘qualifying transfers’ and the settlor of T1 must continue to be non-domiciled on each of these occasions. But if at the time of a qualifying transfer the settlor of T1 is UK domiciled then the transferred assets can no longer have excluded property status.
If the settlor of T1 is no longer living at the time of a qualifying transfer (and the death is not a qualifying transfer) then the additional domicile test is treated as satisfied.
- The assets are transferred to T2 because of an assignment or the exercise of a general power of appointment
In this case the transferred assets can only continue to have excluded property status if at the time of an assignment or the exercise of the power (which must occur on or after 22 July 2020) the assignor or the power holder is not domiciled or deemed domiciled in the UK.
Note that the assets may not become comprised in T2 immediately when the assignment is made or the power is exercised. If the qualifying transfer occurs at a later time, then the assignor or power holder must not be a formerly domiciled resident at the time the assets do move to T2 (as well as being non-domiciled at the time of the assignment or exercise).
Consult with Technical advisors at an early stage if the facts are not clearly covered by the guidance above including situations where there are transfers after 22 July 2020 that may be affected by earlier trust-to-trust transfers or where the analysis may depend on the effect of the judgment in Barclays Wealth v HMRC (2017) EWCA Civ 1512.