Graeme Robb, technical manager at Prudential, investigates excluded property - an often overlooked area of inheritance tax exemption
As the saying goes: plus ça change, plus c’est la même chose – the more it changes, the more it is the same. In the world of inheritance tax (IHT), a more accurate phrase might be: the more it is the same, the more it changes.
The nil rate band is staying the same – a flat-lined £325,000 in force from 6 April 2009 to April 2019. IHT takings are changing and are on the up year-on-year. Indeed, current HMRC statistics suggest 2012/2013 takings may represent a double-digit increase from 2011/2012.
IHT advice is, therefore, becoming an increasingly important discipline for advisers.
Plus ça change...plus c’est la même chose
The ground rules
The first three sections of the IHT Act 1984 set the ground rules and state that IHT is charged on transfers of value made by individuals, ignoring exempt transfers and excluded property. It is therefore important these two exempt areas are explored at the beginning of any IHT planning exercise.
IHT exemptions receive widespread coverage but excluded property is often covered with less depth. For the avoidance of doubt, note that no IHT is chargeable on excluded property.
What to look out for
The three aspects advisers should be particularly aware of are as follows:
1 Property situated outside the UK owned by someone domiciled outside the UK is excluded property. Immovable property (e.g. land) is situated where it is located, and chattels are situated where they happen to be at the relevant time. Another example would be an offshore bond, which is typically situated where the life insurance company is located.
2 Excluded property does not exclusively have to be situated overseas. In 2002, the UK government announced a package of measures to boost the competitiveness of UK fund managers. In the words of an official Treasury announcement, the changes were designed to make fund investments “more attractive to foreign investors”. Accordingly, with effect from October 2002, holdings in OEICs and authorised unit trusts are excluded property if held by an individual who is not domiciled in the UK.
To recap, for an individual not domiciled in the UK, offshore bonds and UK authorised investment funds can be free from IHT under excluded property rules. This is all well and good but it is important not to forget the concept of ‘deemed domicile’.
This article continues…
Following 2016 thematic review
December 2018 or early 2019
Feasibility study due
'Let’s be bold enough to demand change'
Joint life second death option added to relieve tax burden on couples gifting assets