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Markel Tax

15 Feb 2017

Excluded Property Case

The Court of Appeal handed down its judgement in the taxpayer’s appeal against the notice of determination in Barclays Wealth Trustees (Jersey) & Anor v HMRC (2017) EWCA Civ 1512 (13 October 2017).

The Facts

Michael Dreelan (Michael) created an excluded property discretionary trust on 21 June 2001 (2001 settlement). Michael was not UK domiciled at the time of the settlement.

The trust assets comprised of 100% shares in a Jersey resident company called Minsk Limited (Minsk), a loan to Minsk and cash held in a Jersey bank account, all of which were excluded property.

On 4 February 2003, Michael transferred 25,000 ordinary £1 shares in QServ Limited (QServ), a UK resident company which in turn was then transferred to Minsk.

On 6 April 2003, Michael became deemed UK domiciled for IHT purposes under IHTA 1984, s267.

Minsk was subsequently dissolved and the QServ shares were distributed to the trustees.

On 4 April 2008, a new settlement was created by Michael and his 3 brothers called the Dreelan Brothers Joint Trust (DBJT), an offshore non qualifying interest in possession trust. On the same day, the trustees exercised a power of appointment under the 2001 settlement appointing the 25,000 QServ shares to DBJT for the benefit of Michael. In addition to this, Michael transferred a further 1,000 shares which he personally held to DBJT.

On 3 July 2008, DBJT sold the QServ shares for cash and an earn out.

By a deed of appointment dated 2 June 2011 (the 2011 appointment), the sale proceeds attributed to the sale of the 26,000 QServ shares (excluding the earn out) were transferred to the 2001 settlement.

On 16 June 2011, the trustees transferred that cash into Jersey bank accounts where it remained until the 10-year anniversary date on 21 June 2011.

The cash in the Jersey bank account at the time of the 10-year anniversary charge therefore comprised of the QServ sale proceeds of which 25,000 shares can be traced back to the 2001 settlement (at the time of which Michael was not UK domiciled) and 1,000 shares added to DBJT when Michael was UK domiciled.

The question therefore arises of whether the money held by the trustees in the Jersey bank account represents in part the trustees original holding of 25,000 QServ shares, was or was not excluded property at the time of the 10-year anniversary arising in the 2001 settlement on 21 June 2011.


The taxpayers appeal was upheld and the property in question was concluded to be excluded property immediately before the 10-year anniversary charge.

The main reasons for this conclusion were as follows:

  • The creation of the 2001 settlement, the transfer of the 25,000 QServ shares to the trustees on 4 February 2003 and the 2011 appointment were viewed as a single settlement for IHT purposes. It was viewed that, under IHTA 1984, s.43(2), it is possible to create a settlement and to have more than one disposition to the trust.
  • Under IHTA 1984, s48(3), when considering the interpretation of a settlement of excluded property, the Courts viewed the subsection to look at the single settlement as it constituted from time to time, whether it be one or a series of transfers into a settlement. It provides that foreign property comprised in a settlement is excluded property unless the settlor was UK domiciled at the time the settlement was made. Therefore, in this case, it would have been the time when the trust instrument was first executed. Under the trust deed, the standard definition of a trust fund included ‘all other money investments or other property’ which might be subsequently transferred or paid to the trustees and accepted by them as additions to the fund.
  • The Courts did not believe that it made a difference that the QServ shares (which were never foreign property) were appointed from the 2001 settlement to the DBJT and that the cash proceeds of the sale were transferred back to the 2001 settlement by the 2011 appointment. Under IHTA 1984, s81(1), the shares are deemed to comprise in the 2001 settlement. This was re-enforced by the fact that sale proceeds were appointed back to the 2001 settlement.
  • Under IHTA 1984, s.81(1), where property moves between settlements, the excluded property provisions shall only apply if the settlor (Michael) was not domiciled in the UK when the settlement (DBJT) was created. The Court did not accept the respondent’s argument that the excluded property fell within this meaning due to the steps outlined above.
  • Even if the Courts did accept the 2011 appointment was effected as a separate settlement, this would not be consistent with the legislation under IHTA 1984, s.81(1). If the QServ shares are deemed to remain within the 2001 settlement, then it cannot also be treated as a separate disposition into the 2001 settlement at the same time.

In summary, the Court viewed that the property representing the 25,000 QServ shares in the 2001 settlement at the date of the periodic charge was excluded property. The QServ shares were transferred to the trustees at a time when Michael was not UK domiciled and if they had never left the 2001 settlement their proceeds, if invested as foreign property, would undoubtedly have qualified as excluded property.

A transfer of property between settlements is dealt with under IHTA 1984, s.81.

A different conclusion may have been reached where a settlor creates an offshore settlement when he is non-UK domiciled, later acquires a UK domicile, and then makes further substantial transfers of property into a settlement. It may be argued that the property in question, if it is or becomes foreign property, should qualify as excluded property merely because the settlor was not UK domiciled when the settlement was originally made.

However, this does not apply to this case because the QServ shares originated from the 2001 settlement and were transferred at a time when Michael was non-UK domiciled.

Wider impact

Care should be taken when practitioners are advising on the tax consequences of creating an excluded property settlement whereby subsequent assets are then added to the trust.

It would seem the important issue in this case was whether there was a single excluded property settlement created with further additions to the trust or was a new settlement created when the transfer of property to the DBJT trust/2011 appointment occurred at which point Michael was a UK domicile settlor. Both scenarios would give rise to very different outcomes where foreign property is concerned.

Tagged Property tax & SDLT
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