Excluded Property Trusts – Time to act now



HM Treasury has recently launched its further consultation on the taxation of non-domiciled individuals, a significant portion of which is dedicated to the taxation of existing non-UK trust structures, in particular those established by non-domiciled individuals (often referred to as ‘excluded property trusts’ or EPTs). The consultation is due to close on the 20 October 2016 and the narrow timeline between this date and the Chancellor’s Autumn Statement (23 November 2016) suggests that much of the proposed changes to the taxation of such structures will substantively remain the same.

These changes are to some extent driven by the new basis of taxation of UK resident non-domiciled individuals (known as RNDs) which will take effect from 6 April 2017 and the introduction of the ‘15 out of 20 year’ rule, which results in longer term UK residents being deemed domiciled in the UK for all relevant heads of taxation.

This article explores the situation for an RND client who established/settled an EPT prior to April 2017 and will become ‘deemed domiciled’ under the proposed new regime. It should be noted that the position can be markedly different where there is UK source income and/or UK residential property within the structure. The comments made below are based on the consultation document and is subject to change.


The regime pre-April 2017

Foreign Income and Gains within the structure

Currently RND individuals have access to the remittance basis of taxation for income and capital gains purposes indefinitely (unless they acquire a ‘domicile of choice’ in the UK under common law). Once an individual is UK tax resident for 7 out of the last 9 tax years, an annual charge is levied to access this advantageous system of taxation.

Foreign income within an EPT structure, where the settlor retains an interest, is typically taxable on the settlor. This potential income tax charge could be deferred if the settlor elected for the remittance basis of taxation and did not allow funds from or derived from the structure to be brought to the UK or provide a benefit there. The position for gains within the structure is more complex, but the overall effect is that said gains were unlikely to be assessable on the settlor until a distribution was made from the structure.

Assets held by the Trust

A significant advantage of EPTs under the current regime is that the assets within the structure continue to be outside of the scope of Inheritance Tax (IHT) even after the settlor either becomes ‘deemed domiciled’ for the purposes of IHT, or acquires a ‘domicile of choice’ in the UK. As a UK resident, individuals will be aware that the rate of IHT is high (currently 40% after deduction of a ‘nil rate band’ of £325,000) and EPTs can provide a significant ‘shelter’ from this tax for foreign situated assets.

It should be noted that individuals should not seek to contribute further foreign assets to an EPT after they have become ‘deemed domiciled’ for IHT purposes.


The new regime as envisaged by the consultation

Foreign income and gains within the structure

As explained previously, an RND individual could defer the tax charge on foreign income within the structure by electing for the remittance basis. After April 2017 this will not be possible if they have been UK tax resident for ‘15 out of 20’ tax years. This results in what is known as a ‘dry tax’ charge because the individual is taxable on the income but they do not immediately have access to it. In addition, accessing the funds within the trust could also give rise to additional tax charges; a potential tax-on-tax position could arise.

In order to circumvent this issue the consultation suggests that the individual will not be taxable in relation to the foreign income within the structure until such time as they, or someone connected with them, receives a benefit/distribution from the structure anywhere in the world. The mechanics of the charge will broadly result in the individual being taxable on the higher of the untaxed income within the structure or the value of the benefit/distribution.

It is reasonable to say that this is an excellent proposal and makes EPTs a very attractive option for RNDs who are not yet ‘deemed domicile’ but looking to defer the tax on their foreign source income.

The proposed regime for foreign gains within an existing EPT structure is somewhat less attractive. Broadly, deferral will still be possible under the regime envisaged by the consultation but once a benefit is received, again by the settlor or someone connected with them, the current year gains and future gains will be assessable in perpetuity. This is very positive for individuals who are unlikely to require any future benefit from the trust, but not so much if future access is envisaged.

I, and many of my colleagues within the profession, hope that we will see an alignment of the treatment of both foreign income and gains in such scenarios to address this disparity but this is unlikely to be known until after the Autumn Statement 2016.

EPTs and IHT

Perhaps the most positive aspect of the further consultation was HM Treasury re-affirming the comments made by The Chancellor in the 2015 Summer Budget regarding EPTs, stating that they would still retain their protected status for the purposes of IHT even if the individual who established the structure could benefit from it.

The EPT therefore remains an incredibly powerful tool for clients’ seeking to manage succession and also ‘ring fence’ their foreign assets from a charge to IHT in perpetuity.


The position for EPT structures post April 2017 is to some extent uncertain, but it appears that HM Treasury is minded for them to retain their tax advantaged status. Whilst we are unlikely to understand the position further until after the Autumn Statement, there are some key takeaways for clients with existing structures or who are in a position to create structures before becoming ‘deemed domiciled’:-

  1. Establishing trusts takes time – individuals will need to consider their succession objectives, cross jurisdictional issues and advice, and complications with transferring certain assets in to an EPT structure
  2. Existing EPT structures should be reviewed to understand how they might be impacted and identify any further opportunities to utilise them
  3. Significant care should be taken if you are seeking to add assets to an existing EPT
  4. The window to create such structures may be impacted by the changes in the ‘deemed domicile’ legislation from April 2017.

The lack of absolute clarity in this area is unfortunate but what cannot be stressed more strongly is that inertia could in certain cases lead to significant advantages being lost, which may never be recoverable for certain individuals. It is of paramount importance that those lucky enough not be domiciled in the UK review their position at the earliest possible juncture.

Written by Sean Bannister, Partner | Tax, Edwin Coe LLP, for Abacus Trust Company Limited