Excluded Property From Inheritance Tax
Inheritance Tax can blight the financial affairs of many individuals often affecting them at the worst possible time. There are a number of ways in which your Inheritance Tax (or IHT) liabilities can be mitigated, however, as it is possible to take advantage of numerous exemptions, exclusions and relief packages.
Excluded PropertyAside from spouse-to-spouse transfers (which are exempt from IHT and are covered in our article Distribution of the Estate in this section), one of the most important set of exclusions from the IHT schedule is known as ‘excluded property’, and affects those domiciled outside the UK. In the first instance, it might be useful to investigate the definition of ‘domiciled’. This is an important legal term that can affect tax matters in several ways. In basic terms, domicile refers to the country in which you have your permanent residence. It is important to note that this is distinct from your nationality.
Many of the IHT rules regarding those domiciled outside the UK also revolve around settled property. This term describes property that has been placed in trust for beneficiaries. The property that has been placed in trust is known as ‘settled property’. This has implications for those who have certain government securities. If an individual’s estate, for example, includes securities which have been settled, they will not incur inheritance tax if the beneficiary is not domiciled in the UK. In some cases, these securities are known as FOTRA securities or Free of Tax to Residents Abroad. Indeed, settled property can be highly tax efficient for those domiciled abroad; settled property which is held outside the UK is counted as excluded if it was settled by an individual who was also domiciled outside the UK.
Small SavingsTo many individuals, the Channel Islands and the Isle of Man are synonymous with tax avoidance. In many ways this holds true for Inheritance Tax, as many forms of ‘small savings’, such as National Savings Certificates, are counted as excluded property if the holder of the Certificates is domiciled in either of these places. National Savings Certificates are looked at in more detail in our article Fixed Interest and Index Linked National Savings.
There are fairly complex rules about the tax status of pensions paid by former colonial governments to former employees. For example, any pension paid upon the death of a former employee of the Government of India is exempt from Inheritance Tax. This also applies to a number of other ex-colonial countries’ pension schemes, but you should contact your Tax Office for specific case-by-case details.
Foreign AccountsFinally, it is important to note that non-sterling bank accounts are exempt from Inheritance Tax if they meet certain criteria. In the first instance, this will be the case if the individual who held the account was not domiciled in the UK. Alternatively, if the account was settled property and the trustees are not domiciled in the UK, the account will also be exempt from IHT as long as the settlor was also not domiciled in the UK at the time of settlement.
As you can see, the rules surrounding excluded property can be complex. As with all matters concerning Inheritance Tax, it is always wise to seek professional advice before taking any action.