Inheritance Tax – settled and excluded property

Inheritance Tax – settled and excluded property, can be a difficult topic to navigate, especially when it is made up of a lot of different property types and assets.

For Inheritance Tax purposes, each asset has its own separate identity. This means, for example, that one asset within a trust may be for the trustees to use at their discretion and therefore treated like a discretionary trust. Another item within the same trust may be set aside for a disabled person and treated like a trust for a disabled person. In this case, there will be different Inheritance Tax rules for each asset.

Even though different assets may receive different tax treatment, it is always the total value of all the assets in a trust that is used to work out whether a trust exceeds the Inheritance Tax threshold and whether Inheritance Tax is due. There are different rules for different types of trust.

A trust is an obligation that binds a trustee, an individual or a company, to deal with the assets such as land, money and shares which form part of the trust. The person who places assets into a trust is known as a settlor, and the trust is for the benefit of one or more ‘beneficiaries. The act of transferring an asset – such as money, land or buildings – into a trust is often known as ‘making a settlement’ or ‘settling property’.

Some assets are classed as ‘excluded property’, and IHT is not due. However, the value of the assets may be included when calculating the rate of tax on certain exit charges and 10th-anniversary charges.

Types of excluded property can include:

• property situated outside the UK – that is owned by trustees and settled by someone who was permanently living outside the UK at the time of making the settlement
• government securities – known as FOTRA (free of tax to residents abroad)

This can be a complex area, and we recommend you speak to our Trust Manager using the form.