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Use of Foreign Trusts in the UK

By Maxine Higgins and Emma Florentin-Lee, Citroen Wells Chartered Accountants

Trusts have a long history in the UK as a means for individuals to protect, control, and manage the use of assets and ultimately how these assets are passed on to the next generation. They have offered tax advantages, although over the years these have been eroded for UK-domiciled trusts. There is still a significant tax advantage for non-UK domiciliaries to transfer their non-UK assets to a non-UK resident trust. This article solely concerns the protection afforded from UK inheritance tax (IHT) but there can also be income tax and capital gains tax mitigation.

Domicile for UK IHT

IHT (currently at 40%) is chargeable on UK-domiciled individuals, and some UK-domiciled trusts, on their worldwide assets. For a non-domiciled individual, broadly, any assets held outside the UK are not included in the individual’s UK estate and are referred to as excluded property, while assets held in the UK may still be subject to IHT.

On formation of a trust, the trust is considered to be domiciled in the same jurisdiction as where the person creating the trust (the settlor) is domiciled.

An individual may be domiciled in the UK either under general law or deemed domicile rules.

Domiciled under General Law

Domicile is a legal concept not specifically defined. It is not the same as residency. It is generally understood as the place which a person considers to be their permanent home. Under UK general law, an individual has one of three types of domicile:

  1. Domicile of origin – Everyone acquires a domicile of origin at birth, usually their father’s. The domicile of origin takes precedent until it is superseded by a domicile of dependency or choice.
  2. Domicile of dependence – In certain circumstances the domicile may change with that of the person on whom they are dependent. This generally only applies to children under 16, and those lacking mental capacity.
  3. Domicile of choice – A domicile of choice is acquired when an individual takes up residence in a new country and intends to reside there, permanently or indefinitely.

Deemed Domicile

An individual not domiciled in the UK under general law is deemed UK domiciled for IHT purposes if any of points 1 to 3 apply:

  1. Domiciled in the UK under general law at any point in the last three years.
  2. Both a) UK resident for at least 15 out of the last 20 tax years, and b) for at least one out of the last four tax years.
  3. Formerly domiciled resident, defined as someone who satisfies all of the below:
    a. Was born in the UK;
    b. Has a UK domicile of origin;
    c. Is resident in the UK in the year in question;
    d. Was resident in the UK in one or both of the two prior years.

Excluded Property Trusts

IHT does not apply to “excluded property” which, as explained above, is broadly non-UK assets belonging to a non-UK domiciled individual or trust.

If a non-UK domiciled individual places (or “settles”) assets into a trust this would be a non-domiciled trust. It will then protect the non-UK assets of the trust from IHT regardless of what happens to the settlor’s domicile or residence after this point (with the exception of any tax year in which the settlor is deemed domiciled as a formerly domiciled resident).

This is particularly useful if an individual is about to become deemed domiciled. In this situation they could set up an excluded property trust prior to becoming deemed domiciled and thus protect all foreign assets within the trust from IHT.

UK assets can be protected by holding through a non-UK company owned by the trust as it is directly held assets which must be non-UK situs. However, foreign assets deriving their value from UK residential property remain within the scope of IHT.

It is essential that that no further assets should be settled into the trust by the settlor once UK domiciled or deemed domiciled as this may jeopardise its excluded property status.


Maxine Higgins

Maxine Higgins

GGI member firm
Citroen Wells Chartered Accountants
Auditing and Accounting, Tax, Advisory, Corporate Finance, Fiduciary and Estate Planning
London, UK
T: +44 20 7304 2000
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W: www.citroenwells.co.uk

Citroen Wells' partners include specialists with years of practical knowledge assisting their international clients, including the financial problems facing property investors, dealers, and developers. They offer a range of high-quality accounting, tax, financial, and business services.

Maxine Higgins is a long-standing Partner at Citroen Wells experienced in dealing with personal taxation, family offices, trusts and estates, and inheritance tax planning.
Emma Florentin-Lee

Emma Florentin-Lee

GGI member firm
Citroen Wells Chartered Accountants
Auditing and Accounting, Tax, Advisory, Corporate Finance, Fiduciary and Estate Planning
London, UK
T: +44 20 7304 2000
E: This email address is being protected from spambots. You need JavaScript enabled to view it.
W: www.citroenwells.co.uk

Emma Florentin-Lee is a Partner at Citroen Wells dealing with a wide range of clients’ tax and accounting needs. She recently passed her Chartered Tax Advisor exams and won two awards for her performance in the Inheritance Tax, Estates and Trusts paper. She is increasingly involved with this area of the firm. Currently, Emma is on maternity leave.


Published: Trust & Estate Planning Newsletter, No. 05, Spring 2020 l Photo: zgphotography - stock.adobe.com

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