Excluded Property Trust UK (2026): Non-Dom IHT Planning, IHTA 1984 s.48, Finance Act 2017 Deemed Domicile Changes

An excluded property trust is a settlement of non-UK assets made by a non-UK domiciliary for IHT purposes. The key rule is in IHTA 1984 s.48: (1) THE BASIC RULE — IHTA 1984 s.48: property comprised in a settlement is EXCLUDED PROPERTY if: (a) the property consists of assets situated outside the United Kingdom; AND (b) the settlor was domiciled outside the United Kingdom at the time the settlement was made. If both conditions are met, the non-UK situs assets in the settlement are excluded from UK IHT — they are not in the settlor's or the beneficiaries' chargeable estates for IHT; (2) WHAT 'EXCLUDED PROPERTY' MEANS IN PRACTICE: excluded property is simply outside the IHT net. There is no IHT on: (a) the creation of the settlement (the initial transfer); (b) 10-year anniversary charges (periodic charges under IHTA s.64); (c) exit charges on distributions from the settlement (IHTA s.65); (d) the assets if they are still in the settlement on the settlor's death; (3) THE TWO CONDITIONS EXAMINED: (a) Non-UK situs assets: the assets in the trust must be situated outside the UK. This includes foreign bank accounts, foreign shares, foreign real estate, foreign business assets. UK assets (UK shares, UK property, UK bank accounts) are NOT excluded property — they remain within the scope of IHT regardless of domicile; (b) Non-UK domicile of settlor at time of settlement: the settlor must not have been UK domiciled (in the general law sense) at the time the settlement was made. The general law concept of domicile is used for this purpose — not the special IHT 'deemed domicile' rule (though see below for how deemed domicile affects this); (4) THE CRITICAL TIMING: the exclusion is judged at the TIME THE SETTLEMENT IS MADE — not at the date of death or the date of distribution. If the settlor was non-UK domiciled when the settlement was created, the assets remain excluded property even if the settlor later becomes UK domiciled (or deemed UK domiciled) — provided the assets remain non-UK situs. This is the fundamental planning benefit: a non-dom can create the trust early and the assets remain outside UK IHT even after UK domicile is acquired.

The Finance Act 2017 introduced significant changes to the deemed domicile rules for IHT, which interact directly with excluded property trust planning: (1) PRE-2017 DEEMED DOMICILE RULE (ORIGINAL IHTA 1984 s.267): the original rule deemed a person UK domiciled for IHT purposes if they had been UK resident for 17 of the preceding 20 tax years (the '17-in-20' rule) OR had UK domicile under general law within the previous 3 years. Once deemed domiciled, ALL worldwide assets were subject to IHT — but existing excluded property trusts retained their excluded status (because the situs and domicile-at-settlement tests were already satisfied); (2) FINANCE ACT 2017 DEEMED DOMICILE CHANGES — THE '15-IN-20' RULE: the Finance Act 2017 (taking effect from 6 April 2017) changed the residency-based deemed domicile test from 17-in-20 to 15-in-20 tax years. A person who has been UK resident in at least 15 of the preceding 20 tax years is deemed UK domiciled for IHT (and now also income tax and CGT). This catches non-doms earlier; (3) EFFECT ON EXCLUDED PROPERTY TRUSTS — THE KEY PROTECTION SURVIVES: critically, the Finance Act 2017 preserved the fundamental benefit of excluded property trusts for those who settled them BEFORE becoming deemed domiciled. If a non-dom created a trust of non-UK assets before reaching deemed domicile (i.e. before the 15th year of UK residence), those assets continue to be excluded property even after the settlor becomes deemed domiciled. The protection is locked in at the date of settlement; (4) THE 'FORMERLY DOMICILED RESIDENT' RULE (FDR): the Finance Act 2017 also created a new 'formerly domiciled resident' (FDR) category — a person who was born in the UK with a UK domicile of origin, left and acquired a foreign domicile, and then returned to live in the UK and becomes UK resident. An FDR is treated as UK domiciled for IHT immediately on becoming UK resident (no 15-year waiting period). FDRs cannot create excluded property trusts during UK residence. For FDRs who created trusts of non-UK assets before returning, the position was also changed — the trust assets may no longer be fully excluded during years of UK residence; (5) PRACTICAL IMPLICATION OF FA 2017 TIMING: non-doms who are UK resident should create excluded property trusts as early as possible in their UK residency — certainly before year 15. Every year of delay shrinks the planning window.

The type of asset is critical — only non-UK situs assets can be excluded property in a settlement: (1) DETERMINING SITUS OF ASSETS: the situs of an asset for IHT (and the conflict of laws) is determined by the lex situs — broadly where the asset is legally located: (a) Bank deposits and cash: situs is the branch where the account is held. A bank account with a UK branch is UK situs, even if operated remotely from abroad. A foreign bank account is non-UK situs; (b) Shares: shares in a company are generally situated where the company is incorporated and the share register is maintained. Shares in a UK company (including UK-listed shares) are UK situs. Shares in a foreign company are generally non-UK situs. UK gilts and UK Treasury bonds are UK situs; (c) Real property: situated where the land is located. UK real estate is UK situs — it can NEVER be excluded property regardless of domicile; (d) Debts: generally situated where the debtor resides. A debt owed by a UK debtor is UK situs; a debt owed by a foreign debtor is non-UK situs; (e) Life insurance: a life policy is generally situated where the insurance company carries on business. UK policies are UK situs; (2) UK ASSETS CANNOT BE EXCLUDED PROPERTY: this is a fundamental point often misunderstood. Even if the settlor was non-UK domiciled at the time of settlement, UK situs assets (UK property; UK shares; UK bank accounts) placed in the trust are NOT excluded property. They remain within the scope of IHT — subject to the relevant property regime (periodic and exit charges). Only the non-UK assets are protected; (3) OFFSHORE INVESTMENT BONDS: a common vehicle used in excluded property trusts. Where a UK person assigns a UK-denominated bond to an offshore trust, the situs of the bond may remain UK — professional advice on product structuring is essential; (4) FOREIGN PROPERTY ALREADY OWNED: many non-doms have existing foreign bank accounts, shares in family companies, or property in their country of origin. These can be placed in an excluded property trust directly. The key is ensuring they are non-UK situs at the time of settlement AND that the settlor is non-UK domiciled (and not deemed domiciled) at that time.

An excluded property trust can outlive the settlor and continue for future generations. The IHT treatment on and after death depends on the trust structure: (1) ON THE SETTLOR'S DEATH — NO IHT ON NON-UK ASSETS: the excluded property within the trust does not form part of the settlor's estate for IHT — even if the settlor was UK domiciled (or deemed domiciled) at death. The property never became a chargeable transfer because it was excluded property. The settlor's death does not cause the excluded property to leave the trust or to become subject to IHT; (2) THE RELEVANT PROPERTY REGIME DOES NOT APPLY TO EXCLUDED PROPERTY: an excluded property trust is not subject to the 10-year anniversary charge or exit charges that apply to relevant property trusts (IHTA ss.58-69) — because the assets are not 'relevant property'. If the trust holds a mix of UK and non-UK assets, the UK assets ARE relevant property and are subject to the relevant property regime; (3) DISTRIBUTIONS TO BENEFICIARIES: distributions of non-UK situs excluded property to beneficiaries are not subject to exit charges. The beneficiaries receive the assets free of IHT; (4) CHANGE OF SITUS RISK: if excluded property in the trust changes situs from non-UK to UK (e.g. a foreign company is re-registered as a UK company; a foreign bank account is moved to a UK branch), it may cease to be excluded property at that point. Ongoing monitoring of asset situs is essential; (5) INCOME TAX AND CGT — SEPARATE ANALYSIS NEEDED: the excluded property trust rules only address IHT. The income tax and CGT treatment of offshore trusts — particularly the trust anti-avoidance provisions (ITA 2007 ss.733A+; TCGA 1992 ss.86-98; the disguised remittance rules in ITA 2007 Part 13) — are complex and separate. UK-resident beneficiaries of offshore trusts may be subject to the transfer of assets abroad provisions or offshore income gains rules. The IHT excluded property status does not affect this analysis.

The Finance Act 2025 introduced the most significant reforms to the taxation of non-doms in decades, replacing the remittance basis system with a new Foreign Income and Gains (FIG) regime: (1) THE BROAD CONTEXT — NON-DOM REFORM FROM APRIL 2025: the remittance basis for income tax and CGT was abolished from 6 April 2025. UK residents (regardless of domicile) are now taxed on a arising basis on worldwide income and gains, with a 4-year exemption for new arrivals (the FIG relief). The concept of 'non-domicile' as a tax status was significantly restructured; (2) IHT NON-DOM REFORM — RESIDENCE-BASED SYSTEM: for IHT, from 6 April 2025, the Government also announced a move to a residence-based system. Under the proposed changes: (a) a person is within the scope of UK IHT on worldwide assets if they have been UK resident for 10 or more years (replacing the 15-in-20 deemed domicile test); (b) there is a 'tail' period — a person who was UK resident for 10+ years and then leaves remains within the scope of UK IHT for a further period (the length depends on the number of years of UK residence); (c) note: the precise legislative detail and final rules require verification with current HMRC guidance, as some elements remained in consultation at the time of writing; (3) EFFECT ON EXISTING EXCLUDED PROPERTY TRUSTS: the Government confirmed that excluded property trusts settled BEFORE the relevant date would retain their excluded status under transitional provisions — existing trusts would not be immediately unwound. However, the specific transitional rules require careful professional advice; (4) PLANNING IMPLICATION — ACT QUICKLY: where a non-dom has not yet created an excluded property trust, the window for doing so (before reaching the 10-year residence threshold under the new rules) is critical. Non-doms resident in the UK for fewer than 10 years should urgently take advice on whether to create or add to an excluded property trust before the new residency threshold is reached; (5) THE CORE PRINCIPLE REMAINS: the fundamental IHT logic of excluded property — non-UK situs assets settled while non-UK domiciled are outside the UK IHT net — remains in place. What changes is when that status is lost (earlier, under the new 10-year rule).