Excluded Property Trust

• Investment options: your client can choose to invest in one of the bonds from Prudential International. In addition, the trustees may invest in UK OEICs.  

• Tax efficiency: trustees have the opportunity to take tax-efficient withdrawals from the trust for your client or their beneficiaries.

• Inheritance Tax (IHT): there will be no UK IHT to pay if the only investments are 'excluded property' such as Prudential International bonds or UK OEICs.

• Non-UK Domiciled: the trust is designed for clients who are currently non-UK domiciled but may in the future become UK domiciled.

• Full control: the trustees have full control over the investments in the trust.

The value of any investment can go down as well as up so your client might get back less than they put in.

The Excluded Property Trust is for clients who are currently not domiciled within the UK or treated as domiciled within the UK, who want to mitigate IHT when they later become UK domiciled. The trust fund will not be subject to IHT providing it holds ‘excluded property’.

The trustees have full control over the investments and are able to make payments to any beneficiary, including your client who is the settlor, at any time.

The trust can also provide IHT protection for beneficiaries, even if they're UK domiciled. The investments will not form part of their estates until distributed to them, so any funds that remain in the trust will not be liable for UK IHT.

More information on what determines where assets are situated can be found in the Guide to the Excluded Property Trust (PDF).

There are three key rules to follow to ensure that trust investments will be outside the UK IHT provisions.

• Your client must not be, or be treated as, UK domiciled when they set up the trust.

• The trust fund must comprise 'excluded property' such as offshore bonds and OEICs.

• If your client later becomes UK domiciled, or treated as UK domiciled for IHT purposes, your client must not put any further money or assets into the trust.

The trust is set up to run for 125 years. After your client's death, it can be continued, with the assets remaining within it, or it can be wound up by the trustees and the assets distributed to the beneficiaries.

If there is trust property remaining at the end of the trust period, the remaining trust fund will be split in equal shares between your client's children, grandchildren and great grandchildren, who are alive at that time. However, the trustees are free to distribute the trust fund to any beneficiary at any time during the trust period.

If your client and your client's spouse or civil partner are both non-UK domiciled, your client may set up the trust together as joint settlors. Alternatively, they may each set up a trust individually.

The trustees

The trustees will manage the trust and have control over the trust fund investments. Your client will automatically be one of the trustees. If two of your clients are setting up the trust jointly they will both be trustees. There should be at least two individual trustees (or a corporate trustee) and your client can appoint additional trustees in the Trust Declaration form.

After your client's death, the remaining trustees will have considerable freedom to decide who is to benefit from the trust fund. It's important that your client gives careful consideration to the choice of trustees, so that they'll be sufficiently familiar with your client's wishes.

The beneficiaries

The Trust Provisions include a standard list of beneficiaries who will be automatically included as people who may benefit from the trust:

• your client,

• your client's present, or any future, spouse, widow(er) or civil partner,

• your client's children, stepchildren and other descendants,

• any spouse, widow(er) or civil partner of your client’s stepchildren and other descendants.

Your client may include anyone else they would like to benefit as an additional beneficiary.

The trustees, at their discretion, can make payments from the trust fund to any of the beneficiaries, including your client, at any time. There's no restriction on when or how payments can be made during the trust period, either before or after your client's death.
 

The investments in the Excluded Property Trust will normally be one of two Prudential International bonds:

• Prudential International Investment Bond  

• Prudential International Investment Portfolio
  

The funds for the initial investment should come from a non-UK source (e.g. a non-UK bank account).
 

The profit made on your client's bond, known as the 'chargeable event gain', is potentially liable for UK Income Tax. This will arise when there is a 'chargeable event', for example:

• the bond as a whole is cashed in,

• individual policies within the bond are cashed in,

• regular and one-off withdrawals, taken from the bond including any adviser charges your client has asked us to take from the bond, exceed the 5% tax-deferred allowance, or

• a benefit becomes payable on the maturity date or death of the life assured.

There's a hierarchy of people who may be liable for any tax charge that arises, starting with your client as the settlor. If the settlor is alive and resident in the UK when a chargeable event occurs, or it occurs in the same tax year in which the settlor dies, the 'chargeable gain' will be taxed on the settlor as if it were part of their income.

If the settlor is not resident in the UK or has died in a previous tax year, the tax charge will be transferred to the trustees to be paid from the trust. Finally, if the trustees are not resident in the UK for Income Tax purposes, the charge will fall on any beneficiaries who are resident in the UK, when they receive money from the trust.

Prudential International is based in Dublin, Ireland and is not liable for any form of tax on the gains on its customers' funds. It also has the advantage of paying no tax on any income it receives within the fund. Overall, its funds suffer less tax than equivalent UK life funds.

This tax advantage is a direct result of Prudential International choosing to be based in Dublin. As your client is investing with Prudential International, the fund the investment goes into is largely tax-free (apart from any irrecoverable withholding tax).