Excluded Property Trusts Explained

Excluded property is a technical term in inheritance tax law. Broadly, it describes assets that fall outside the scope of UK inheritance tax altogether, rather than assets that qualify for a relief or an exemption. The distinction matters: excluded property is not taxed and does not use up any allowance.

An excluded property trust is one holding non-UK situated assets, settled by someone who was not a long-term UK resident at the time the assets were put in. Where those conditions are met, they are not part of the settlor's estate on death, and they are not themselves subject to the ten-yearly and exit charges that apply to relevant property. One qualification matters: HMRC's guidance states that although Inheritance Tax is not paid on excluded property, the value of those assets "may be brought in to calculate the rate of tax on certain exit charges and 10 year anniversary charges". The excluded property escapes the charge, but it can still affect the rate applied to other assets in the same trust.

Two things determine the answer. The first is where the assets are situated, which is a question of law rather than of where the paperwork is kept. UK residential property is a specific exception: where an overseas asset derives its value from UK residential property, that value is within the scope of UK inheritance tax even though the asset itself is situated abroad. The second is the settlor's status at the time of settlement, and that is where the rules changed.

From 6 April 2025, inheritance tax is based on long-term UK residence rather than domicile. HMRC's test is UK residence in "at least 10 out of the last 20 tax years immediately preceding the tax year in which the chargeable event (including death) arises".

This replaced a concept that was often uncertain and sometimes contested. Domicile depended on intention and origin and could be argued about for years. Residence is counted, and while the underlying residence test itself has its own complexity, the twenty-year lookback is at least a matter of record.

The practical consequence is that anyone who arrives in the UK has a defined window. Assets settled into trust before they become long-term resident can qualify as excluded property. Assets settled afterwards will not. That makes the tenth year of residence a genuine planning date rather than an arbitrary one, and one that is worth marking well in advance of arriving at it.

Once the ten-of-twenty threshold is crossed, worldwide assets come within the scope of UK inheritance tax. Assets held personally are then in the estate in the ordinary way, subject to the nil-rate band and any available reliefs — our article on the inheritance tax threshold covers how the bands work.

Trusts already in existence are treated according to the settlor's status when the assets were settled, which is why the timing of settlement is decisive rather than the current position. Adding further assets to an existing trust after becoming long-term resident does not inherit the earlier treatment.

This is also why the area needs proper advice rather than a general article. The interaction between the settlor's status, the situs of each asset, the date of each addition, and the trust's own charging regime produces answers that differ from trust to trust.

Leaving the UK does not end long-term resident status immediately. There is a run-off period, and its length depends on how long you were resident.

Someone who leaves after between ten and nineteen years of UK residence remains within scope for a minimum of three years, increasing by one additional year for each further year of residence, up to a maximum of ten years. Someone resident for fifteen years, for example, remains in scope for five years after departure.

The status can also reset. An individual will not be treated as long-term UK resident in the year following ten consecutive years of non-residence, even if they subsequently return to the UK — the twenty-year test is effectively reset at that point.

For anyone with pension savings abroad as well as other assets, the income tax position on leaving is a separate question from the inheritance tax one, and our article on tax on overseas pensions covers that side.

Most UK trusts fall within the relevant property regime, which brings entry charges, ten-yearly periodic charges and exit charges. Our article on discretionary trusts explains how that works, and bare trusts sit outside it for different reasons, because the beneficiary is absolutely entitled from the outset.

Excluded property is different again. It is not a type of trust so much as a status the assets in a trust may have. The same trust can hold excluded property and non-excluded property at the same time, and the status can change as assets are bought, sold and moved.

This is not an area to approach without specialist advice, and that is not a formality. The questions involved — residence history, asset situs, the timing of each settlement, the interaction with the tax rules of the other country involved, and any double taxation treaty — are individually technical and interact with each other. The cost of getting it wrong is usually measured in years of unwinding.

If you are approaching ten years of UK residence and hold assets abroad, taking advice while the options are still open is generally more useful than doing so afterwards.