Changes to the treatment of UK residential property held by offshore trusts mean that many offshore trusts that were not exposed to UK Inheritance Tax (IHT) now fall within the UK IHT regime. This regime has been effective since 6 April 2017.

Prior to this date, it was common for non-UK domiciled settlors to hold UK residential property through an offshore company and trust structure and not be subject to UK IHT.

What is an offshore trust?

An offshore trust is a trust which has been set up in an offshore jurisdiction e.g. the British Virgin Islands. It will usually also have non-UK resident trustees.

Why have an offshore trust?

For certain individuals, offshore trusts can have UK tax advantages as well as non tax advantages such as succession planning and wealth protection.

The jurisdictions themselves may also have favourable tax and privacy laws, although successive changes to legislation have been aimed at making such structures more transparent.

What is inheritance tax (IHT)?

Inheritance tax is a tax which may be charged on certain lifetime gifts, an individual’s estate on death and on certain types of trust.

What has changed?

The rules have changed so that IHT does now apply to trusts holding UK residential property directly or indirectly.

The rules have also changed in relation to loans made to allow trusts’ beneficiaries to purchase, maintain or improve UK residential property which may bring the benefit of such loans within the UK IHT net. Furthermore, loans to UK resident beneficiaries are UK situs assets for the purposes of UK IHT.

How and when does inheritance tax apply to offshore trusts?

Offshore trusts are subject to UK IHT entry, exit and periodic charges on the value of their relevant property.

For trusts set up by non-UK domiciled settlors, relevant property originally referred just to UK situs assets owned directly by the trustees (although there are some exceptions). However, as a result of the 2017 changes, it also now includes indirect holdings of UK residential property and loans to beneficiaries used to purchase, maintain or improve UK residential property.

• An entry charge is a charge on the value of the relevant property going into a trust.
• An exit charge is a charge on the value of the relevant property leaving the trust.
• A periodic charge is a 10 year anniversary charge based on the value of the relevant property at every 10 year anniversary from the date the trust was set up.
• The trustees may have reporting requirements even if there is no IHT to pay.
  Offshore trustees, therefore, need to be aware of the complexities involved in determining the UK IHT obligations and ensuring the required reporting has been done.

For further advice on inheritance tax and offshore trusts, speak to our international tax team today.