1.Section 175 provides for an amendment to existing legislation which will allow trustees to switch UK assets held in settlement made by non-UK domiciled individuals to investments in Open Ended Investment Companies (OEICs) and Authorised Unit Trusts (AUTs) without incurring inheritance tax. The changes made by this section will have retroactive effect so that no tax will have arisen in those trusts which already held AUTs or OEICs when changes introduced in section 186 to Finance Act (FA) 2003 came into effect. Nor will any tax have arisen in those trusts where UK assets were invested in OEICs and AUTs since the coming into effect of FA 2003.
2.Subsection 1 adds new section 65(7A) to Inheritance Tax Act 1984 (IHTA) which exempts investments in OEICs and AUTs from a charge under that section.
3.Subsection 2 provides for the new section 65(7A) to have retroactive effect for investments made on and after 16 October 2002.
4.Section 186 of Finance Act 2003 introduced Section 6(1A) to Inheritance Act 1984 (IHTA) which treats investments in OEICs and AUTs owned by non-UK domiciled individuals as excluded property. This has the effect of exempting such investments from the charge to inheritance tax under Section 1 of IHTA.
5.The same Act introduced an equivalent provision, Section 48(3A), to provide a similar exemption for holdings in authorised unit trusts or open ended investment companies held in trust provided the settlor was domiciled outside the UK when the settlement was made. The new provisions came into effect for transfers of value or events occurring on or after 16 October 2002.
6.Section 65 IHTA provides for a charge to tax where the property comprised in a settlement ceases to be relevant property. Excluded property is not relevant property and therefore by making investments in OEICs and AUTs excluded property, it automatically created a charge under section 65 on those investments. Section 65(7) provides for an exception to this charge where property comprised in a settlement ceases to be relevant property “by reason only that property comprised in a settlement ceases to be situated in the UK and thereby becomes excluded property by virtue of section 48(3)(a)”.
7.The above section provides for a further exception to the s65 charge, similar to s65(7), in respect of property that is invested in AUTs and OEIC’s and thereby becomes excluded property by virtue of section 48(3A)(a).