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Finance Act 2012

Background Note

12.IHT is normally charged on the value of a person’s estate at death after deducting reliefs and the nil-rate band. There is a separate relevant property regime that charges IHT on assets held in trusts, which are not included in a person’s estate. If a UK-domiciled individual settles assets into an offshore trust, the transfer into trust will be charged to IHT and the value of the trust assets above the nil-rate band will also be subject to IHT. IHT is not charged on those transactions undertaken by companies, other than close companies.

13.Where the settlor is not UK-domiciled, settled property situated outside the UK is excluded from the IHT charge and is referred to as excluded property. Anti-avoidance provisions ensure that where an ‘interest in possession’ (IIP) in such excluded property is purchased for value, the trust assets are subject to IHT as part of the purchaser’s estate. However, if a UK domiciled individual acquires an interest in excluded property which is not an IIP, there may be no charge to IHT when the interest is acquired. The settled property may escape any subsequent charge to IHT either as part of the individual’s estate or under the relevant property regime. In addition, the individual’s estate may be reduced by any debt where the acquisition is financed by a loan.

14.The amendments to the settled property provisions in section 210 will apply to avoidance schemes where arrangements exploit the excluded property rules by converting UK assets to ones that are excluded from the IHT charge and do not give rise to a transfer of value when that conversion occurs. A transfer of value will arise and the assets will no longer be treated as excluded property. Instead, the settled property will fall within the relevant property regime.

15.The scope of the new provisions also extends to arrangements where a UK corporate settlor has settled assets as part of an avoidance scheme and to certain arrangements where an individual retains a reversionary interest in settled property they have acquired.

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