From 6th April 2025, the removal of domicile as a connecting factor for inheritance tax (IHT) will have a significant impact on trusts and not just individuals. Prior to 6th April 2025, non-UK assets could be settled on trust by a non-UK domiciled settlor and remain outside the scope of UK IHT. This protection will no longer be available if the settlor is a long-term UK resident (resident in 10 of the last 20 years).
By Tom Annat – Senior Tax Manager
Excluded property trusts
From 6 April 2025, non UK assets in a settlement will be excluded property (not subject to IHT) when the settlor is not long-term UK resident. When a settlor is long-term UK resident, assets they have settled (even when not long-term resident) will be subject to UK IHT.
Death of the settlor
If the settlor of a trust dies before 6 April 2025, non-UK assets will be excluded property based on the previous test i.e. based on the settlor’s domicile at the time the property was settled on trust.
If the settlor of a trust dies on or after 6 April 2025, the excluded property status of the trust will depend on the settlor’s long-term residence status at their death.
Relevant property trusts
If a settlor of assets which were previously excluded assets becomes long term UK resident, then those assets will become relevant property for IHT purposes. Relevant property trusts are subject to IHT charges upon value leaving the trust (‘exits’) as well as a potential charge at each 10-year anniversary.
Planning opportunities
These changes are hugely significant because assets which were previously outside of the scope of UK IHT may now be chargeable where the settlor is long term UK resident.
Trustees of trusts impacted by these changes may now want to review the structures in place. For example, it might be that offshore trusts are no longer required because they do not offer protection from UK IHT (where the settlor is long term resident). Long term settlors may consider leaving the UK to maintain the excluded property status of the trust.
Trust structures can be very complex, and these new rules will add another layer of complexity. It is important to take early professional advice before making any changes.
Do get in touch with our non-dom tax specialists to find out how to protect your assets.
