Alesha gains a better understanding of the concept of domicile, and learns that domicile isn’t specific to tax but instead is one of general law where there are three kinds of domicile. Firstly, Alesha has an overseas domicile of origin acquired, in this case, from her father at birth. Secondly, that can be replaced by a domicile of choice in the UK if she is resident here and intends to permanently reside here. Currently that doesn’t apply in Alesha’s case, but thirdly there are the artificial deemed domicile rules to consider which apply to long term UK residents. Under those rules, she will be deemed to be domiciled in the UK for all tax purposes once she has been UK tax resident for 15 of the last 20 years. Those that are domiciled within the UK are subject to IHT on worldwide assets – though excluded property within an EPT set up by someone who was not domiciled within the UK at inception will remain free of IHT.
Alesha applies for a £675,000 International Capital Redemption Bond with the funds coming from a non-UK bank account. She then completes the discretionary EPT such that the Bond is immediately issued into the trust. This is achieved simply by inserting into the deed the date she applies for the Bond. She is automatically a trustee, and appoints two additional UK resident trustees who are aware of her written wishes for distributing the trust fund in the event of her death. She can change trustees in the future if necessary.
The trust deed includes pre-printed potential beneficiaries but that class does not automatically include nieces and nephews. At outset, the trustees can simply add nieces and nephews to the class providing that Alesha requests or agrees in writing.
During her lifetime, Alesha can access the funds within the EPT as she is a potential beneficiary. Once the funds leave the EPT, they leave the IHT free environment of the trust.
For Inheritance Tax (IHT) purposes, there are no IHT implications for -
- Gifting into trust
- Death within seven years
- 10th Anniversary
- Capital exiting the trust
With regard to the International Bond, Alesha learns that it will enjoy gross roll-up subject to any irrecoverable withholding tax. There will be no income tax due unless a chargeable event arises and a gain is calculated on that event. The adviser explains that a Capital Redemption Bond has no lives assured meaning that it cannot pay out on the death of the (last) life assured but will instead run until maturity after 99 years. That gives the trustees greater control over the timing of a chargeable event and in practice the Bond will almost certainly be surrendered prior to that date.
For bond tax purposes, Alesha is a UK resident settlor of a discretionary trust with UK trustees. She is taxable if alive and UK resident in the tax year that the gain occurred. If the gain arises in a tax year after her death then the trustees are assessed at trustee rates. Top slicing relief isn’t available to trustees.
After her death, assignments can be made to the nieces and nephews who become taxable if they later encash. It is explained to Alesha that once the beneficiaries are over 18, the trustees can assign segments to them in order that they can subsequently encash with the gain falling on the appropriate beneficiary. Prior to their 18th birthday, segments could be assigned onto a bare trust for the beneficiaries. Under current income tax rules gains can be offset against any
- Unused personal allowance
- Unused £5,000 0% Starting Rate for savings
- Unused Personal Savings ‘Allowance’