Property situated outside the United Kingdom is exempt from United Kingdom inheritance tax (IHT) where:-

  • The owner is a non-United Kingdom domiciled1 individual

  • It is owned by a trust created by a non-United Kingdom domiciled2 individual

A debt under a deed (known as a “specialty debt”) has, until now, been regarded as situated where the deed is kept. So, for non-United Kingdom domiciled individuals, and trusts created by them, debts have until now usually been created by deed and the deed is kept outside the United Kingdom: simple and clean.

Her Majesty’s Revenue and Customs (HMRC) have just published a new interpretation of the rules, however. The amended extract of their inheritance tax manual (see below) now provides that the debt will be regarded as situated where the debtor is located.

This is a problem for non-United Kingdom domiciled individuals and trusts created by them: the exemption (above) from IHT will not be available if HMRC’s amended view is correct. This will, in particular, be a problem where such individuals or trusts:-

  • lend to United Kingdom residents

  • hold life assurance policies issued by United Kingdom companies

This could lead to a tax charge of up to 40% of the taxable value of the debt when a relevant event (such as a gift into trust, the death of the creditor, a gift in the seven years before the creditor’s death, a ten-year anniversary of a trust or a trust distribution) occurs.

Appleby can advise as to whether there may be an issue with particular contracts, bonds, deeds, life policies and other debts and work with you to carry out any necessary re-organisation.

HMRC’s new interpretation of the location of Specialty Debts as set out in the Inheritance Tax Manual (emphasis added)

“IHTM27079 Specialty Debts: Bonds And Debentures Under Seal

A specialty debt is a:

  • debt made by deed, or

  • deed which records or creates obligations, or

  • debt incurred by way of statute, or

  • certain type of debt that is given the nature of a specialty debt by statute

In the past, HMRC's approach to the situs of specialty debts has been that this depends on where the relevant document is found. We have now been advised that our previous approach is unlikely to be correct. We now believe that these debts are situated where the debtor resides. Any cases involving situs and a specialty debt must be referred to Technical. For example, any claim that a debt secured on UK assets is not UK situs property must be sent to Technical.”

Footnotes

1 Please note that “domicile” is not the same as residence – see our separate note on the subject.

2 See footnote 1

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.