Episode Details

🎙️ PODCAST SHOWNOTES

How Inheritance Tax Applies to Offshore Property Trusts

For offshore trusts connected with UK real estate, the inheritance tax analysis depends heavily on two factors:

1. What type of UK property is involved?

2. What is the settlor’s long-term UK residence status?

These distinctions are critical because UK commercial and residential property can produce materially different inheritance tax outcomes when held through an offshore company and trust.

⚖️ 1️⃣ The Post-April 2025 IHT Framework

From 6 April 2025, the UK moved away from domicile as the principal connecting factor for inheritance tax on foreign property and introduced a residence-based framework.

A key concept is whether an individual qualifies as a long-term UK resident (LTR) under the applicable statutory tests.

Broadly, the rules examine an individual's UK tax residence history, including the relevant 10-out-of-20-tax-years test, subject to specific transitional and tail provisions.

This status can determine whether foreign-situs property held within a trust falls within the UK inheritance tax regime.

🏢 2️⃣ Commercial Property Held Through an Offshore Company

Consider the ownership chain:

UK COMMERCIAL PROPERTY

↓

OFFSHORE COMPANY

↓

OFFSHORE TRUST

The trust itself does not directly own the UK building.

Instead:

• The offshore company legally owns the property.

• The trust holds shares in the offshore company.

Those shares are generally foreign-situs assets where the company is incorporated outside the UK.

That distinction can be highly significant for inheritance tax.

🌍 3️⃣ The Excluded Property Analysis

Where the applicable statutory conditions are satisfied, foreign-situs property held within a trust may qualify as excluded property.

For an offshore company holding UK commercial property, this means the relevant trust asset—the foreign company shares—may potentially remain outside the relevant-property regime where the settlor is not within the applicable long-term UK residence rules.

The precise result depends on matters including when the trust was established, when property was settled, the settlor's residence history, and the applicable post-2025 provisions.

💷 4️⃣ Why Excluded Property Status Matters

Where trust property qualifies as excluded property, it may fall outside the inheritance tax relevant-property regime.

That can mean the property is not subject to the usual:

• Lifetime entry charge

• Ten-year anniversary charge

• Exit charge

provided the statutory conditions for excluded-property treatment continue to be satisfied.

This is why the settlor's residence history has become such an important element of modern offshore trust planning.

🏠 5️⃣ Residential Property Is Fundamentally Different

UK residential property is subject to important anti-enveloping rules.

Since April 2017, legislation has restricted excluded-property treatment where foreign company shares derive their value from UK residential property.

Accordingly, inserting an offshore company between a trust and UK residential real estate generally does not recreate the traditional excluded-property protection for the value attributable to that property.

The legislation effectively looks through the offshore corporate wrapper for these inheritance tax purposes.

🚫 6️⃣ The Residential Enveloping Advantage Was Restricted

Historically, a non-UK company could transform direct ownership of UK land into ownership of foreign-situs company shares.

For UK residential property, the post-2017 rules substantially curtailed that inheritance tax planning advantage.

Therefore: