United States: To Taint Or Not To Taint: US Persons Face A New Question About Their Excluded Property Trusts

Last Updated: June 26 2018
Article by Katy Mitchell and Penelope Williams

US citizens and green card holders are already familiar with worldwide taxation. US persons who have become 'deemed domiciled' in the UK for inheritance tax ('IHT') purposes also must contend with the fact that UK inheritance tax no longer applies solely to their UK situate assets (as is the case for UK non-domiciliaries) but rather to their worldwide estates as well. The rates of US federal estate tax and IHT are currently aligned at 40%; however, historically there has been a marked disparity between the available exemptions in each jurisdiction that many US persons living in the UK have wished to account for in their estate planning.

Excluded property trusts ('EPT's) continue to provide an effective vehicle through which to preserve the US federal estate tax exemption. However, recent changes to the UK deemed domicile rules and the introduction of offshore trust protections, coupled with the fact that the remittance basis charge is no longer available to UK non-domiciliaries after 15 years of UK tax residence, has introduced new complications when using EPTs.

h4. Excluded property trusts

EPTs allow a US person (and any other UK non-domiciliary) to keep non-UK situated assets outside the scope of IHT as long as the EPT is established and fully funded before 6 April of the UK tax year in which he becomes deemed domiciled in the UK. By establishing and funding an EPT before becoming deemed domiciled in the UK, a US person is able to preserve the difference between the US federal estate tax and IHT exemptions, resulting in more assets passing tax-free to the next generation.

The recent changes introduced in the US last December (with the passing of The Tax Cuts and Jobs Act 2017) has made the disparity between the US and UK exemptions even more substantial, making the use of EPTs all the more attractive from an estate planning perspective. US persons now have a US$10 million (indexed to US$11.18 million for 2018) exemption from US federal estate and gift tax whereas the 'nil rate band' in the UK is only £325,000 (ignoring the residence nil rate band which is of limited application in this context).

US persons often establish EPTs that are 'offshore trusts' from a UK tax perspective. These EPTs historically were broadly income tax neutral for settlors who did not claim the remittance basis; the settlor generally continued to be subject to US and UK income tax on any trust income as though the trust did not exist, and offsetting credits were generally available for the tax paid. However, the changes to the remittance rules in the Finance (No. 2) Act 2017 (the 'Act') have added a layer of complexity to these trusts.

h4. Changes to the remittance rules and offshore trust protections

As of 6 April 2017, an individual is deemed UK domiciled for UK income tax and capital gains tax purposes in addition to IHT if he has been UK tax resident for 15 out of the prior 20 years (the '15 year rule'). Once an individual is deemed domiciled in the UK he is no longer eligible to access the remittance basis, which means he can no longer receive distributions from an offshore trust outside the UK and avoid a UK tax liability by paying the remittance basis charge.

Under the new 'protected trust' regime brought in by the Act, a non-UK resident trust established prior to the settlor becoming deemed domiciled under the 15 year rule automatically qualifies as a protected trust. Protected trusts benefit from a UK tax-free roll-up of accumulated non-UK income and all non-distributed gains in the trust unless the trust is 'tainted'. The trust's non-UK assets also will be protected from IHT. Provided no additions are made to the trust once the settlor has become deemed domiciled in the UK, there will be no UK tax until a distribution or benefit is received from the trust.

Non-UK income arising in a protected trust is not treated as belonging to the settlor. Gains accruing to the trustees of a trust under which the settlor is a beneficiary are not taxed in the hands of the settlor even if he is deemed domiciled, provided that the protected trust status is maintained.

If the settlor has acquired actual UK domicile status under UK common law (i.e., that the UK has become his permanent home and he intends to remain here indefinitely), then his EPT would no longer be a protected trust, as that status is only available for trusts established by people who later become deemed domiciled under the 15 year rule.

Continuing to allow the EPT to qualify as a protected trust under the new rules may give rise to unexpected issues for US settlors. For instance, the income and gains currently accumulating in the trust could be subject to an effective 'double tax' when eventually distributed to UK resident beneficiaries. For instance, if an EPT qualifies as a protected trust and the settlor is currently paying US income tax charges as they arise, accumulated income and/or gains which are later distributed to UK resident beneficiaries (to, for example, the settlor's children), there would be a UK tax charge at this point in time, and there would be no offsetting credits available for the US tax already paid by the settlor.

h4. To taint or not to taint?

Practically, the settlor may prefer to 'taint' his EPT so that it no longer qualifies as a protected trust. The result of tainting the EPT is that the income and gains would be subject to UK tax in the settlor's hands on an arising basis, and tax credits would be available for the US tax paid. Tainting the EPT would not alter the IHT benefits that the settlor secured when he established the EPT, i.e., the previously settled assets in the EPT would remain outside of his estate for IHT purposes. That being said, new assets settled will not be 'excluded property'.

The tainting rules, their exemptions and the UK tax implications of tainting are complex, so it is important to consider carefully all of the relevant circumstances when deciding how to taint an EPT. For example, new property settled into trust would constitute 'relevant property' under the relevant property regime ('RPR'). Depending on the value of the property added, the addition could constitute a chargeable transfer, triggering an immediate 20% entry charge to IHT. However, as there is no de minimus value for tainting, it should be possible for the settlor to ensure that any addition falls within his UK annual exemption amount of £3,000. The settlor also must consider how the newly settled property is retained in the EPT (or whether, for example, it is used to pay fees or other costs) for the purpose of calculating periodic and exit charges under the RPR. Finally, it will be important to ensure that the transfer of value to the EPT does not fall within the exemptions to the tainting rules.

With respect to timing, a protected trust is tainted in the year in which the tainting occurs. Once the trust is tainted, it is tainted forever and protected status (giving deferral for UK income and capital gains tax) is irrevocably lost. Tainting the trust does not have a retroactive effect for the income and gains already accumulated. The funds prior to the tainting would be considered protected foreign source income in the relevant year. To the extent that the settlor waits to taint the trust, there will be more accumulation to contend with. It may be worth 'running the numbers' to determine whether it would be preferable to pay the higher UK tax rate in the current year versus accumulating more income and gains which will suffer from the 'mismatch' in the future but which provide potential value in terms of immediate investment opportunity. This may depend on the extent to which reliance on trust assets may be needed in the future by UK resident beneficiaries.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Practice Guides
by Mondaq Advice Centers
Relevancy Powered by MondaqAI
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions