Mark McLaughlin looks at a UK investment that can be immediately free of inheritance tax in certain circumstances.
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An individual’s liability to inheritance tax (IHT) on an asset generally depends on the domicile of the individual and the location of the asset. For example:
- An individual who is domiciled in the UK for IHT purposes will be liable on property they own in England (and abroad).
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An individual who is domiciled in Australia will only be liable to UK IHT on a property owned in England.
Forward planning
Conventional IHT planning for non-UK domiciled individuals commonly involves locating assets in an overseas territory.
Thus, if there is a risk of the individual subsequently becoming domiciled in the UK for IHT purposes, those assets are often moved into an offshore trust; foreign located assets held in a trust are generally ‘excluded’ for IHT purposes if the settlor was non-UK domiciled when the assets became comprised in the trust (unless the settlor is a ‘formerly domiciled resident’ for the relevant tax year).
What about non-UK resident individuals who are actually (or ‘deemed’) domiciled in the UK for IHT purposes (e.g., having left the UK permanently but not yet for long enough to lose their UK domicile status)? Such individuals may still be holding assets in the UK; however, can any (non-business and non-agricultural) investments be held in the UK free of IHT until the individual loses their UK domicile (and beyond)?
Flying the flag!
Investing in certain UK government securities (also known as ‘gilts’) has potential advantages. For example, such investments are excluded property for IHT purposes if certain conditions are satisfied. HM Treasury can issue securities with the condition that they are exempt from IHT provided they are beneficially owned by non-UK residents (NB historically, there was an additional requirement that the owner was also non-UK domiciled, but these days domicile is only relevant to issues of 3.5% War Loan stock).
Someone who is domiciled (actually or deemed) in the UK but non-UK resident might consider gilts as an IHT-efficient investment. There is no minimum holding period requirement for IHT purposes. The purchase of gilts by the non-resident individual will provide immediate IHT exemption on death (although the funds to buy gilts cannot be borrowed). Furthermore, the non-UK resident can make a lifetime gift of gilts without the need to survive seven years, which applies for potentially exempt transfers (PETs) to become exempt.
Gilts and trusts
A lifetime gift into trust (e.g., a transfer into a discretionary trust, where all the beneficiaries are non-UK residents) can escape an IHT entry charge on gifts into trust (see HMRC’s Inheritance Tax manual at IHTM27247).
There are also potential IHT advantages in respect of interest in possession (IIP) trusts. If a qualifying IIP beneficiary is a non-UK resident individual, the trust can purchase gilts even if the settlor was UK domiciled. There is no IHT on the death of the IIP beneficiary. The life interest of the non-UK resident beneficiary can be ended before death without an IHT entry charge or deemed PET arising if the beneficiary is non-UK resident.
Practical tip
A list of government securities in issue on 5 April 1998 can be found at IHTM04306. Always seek expert independent financial advice before making any investment.
