- How will the changes impact on Trusts in relation to IHT from 6 April 2025?
At present, the exposure of trust property is linked to the domicile of the Settlor at the time the Trust was established, therefore, if a Trust was established by an individual at a time when they were not UK domiciled and not deemed UK domiciled the non-UK assets within the Trust would be considered “excluded property”, which is outside the scope of IHT. UK situs assets on the other hand, cannot be excluded property (regardless of the tax status of the Trust or Settlor) and would always remain within the scope of IHT if held directly by the Trustees. Indirect interests in UK residential property have been subject to IHT since the changes introduced on 6th April 2017.
From 6 April 2025, however, the Settlor’s Long Term Residence or LTR status will determine the extent to which trust property is regarded as excluded property, regardless of the Settlor’s domicile and when the property became comprised in the Trust.
It had been hoped that IHT protections offered by non-UK resident Trusts already established by non-UK domiciled individuals living in the UK might be grandfathered in but unfortunately the protection offered for existing arrangements is limited.
Accordingly, the excluded property status of trust property and therefore the Trust’s exposure to IHT on each ten year anniversary (the Ten Year Anniversary charge) and an appointment of capital out of the Trust (known as exit charges) will change as and when the Settlor’s LTR status changes.
However, these IHT charges will be apportioned and will only apply for the period during which the trust property is within the charge (so called Relevant Property and not excluded property). A Trust’s Ten Year Anniversary charge can be completely avoided if the Settlor is not a LTR on the ten year anniversary.
- What about Trusts which were created by a UK Domiciled Settlor?
The rule change applies to all Trusts, even those which are already within the Relevant Property Regime because the Settlor was domiciled in the UK when the Trust was created. If the Settlor of such a Trust ceases to be a Long Term Resident the non-UK assets held by the Trustees will become excluded property.
There is no change in relation to indirect interests in UK residential property. These interests will remain within the charge to IHT, regardless of the Settlor’s status.
Whenever trust relevant property becomes excluded property there will be an IHT exit charge. This will occur, for instance, on the following occasions:
- On 6 April 2025 when non-UK situs property of a Trust with a UK domiciled Settlor who is not a LTR becomes excluded property or
- From time to time after 6 April 2025, when a UK resident Settlor ceases to have LTR status. This may be common in practice and will have to be closely monitored.
- Other important scenarios will include the following:
- Where a Settlor dies prior to the new rules being introduced on 6 April 2025 the excluded property status of the Trust will be fixed, based under current rules on the domicile of the Settlor at the time the trust was settled.
- If the Settlor dies after 6 April 2025, the excluded property status of the Trust will depend on whether or not the Settlor had LTR status at the date of death.
- What about the Gift with Reservation of Benefit (GROB) Rules?
Under present rules if a Settlor can benefit from a Trust which they settled the gift into trust will be a GROB. This means the trust property remains within the Settlor’s estate for IHT purposes, unless the property is excluded property leading to a charge on the death of the Settlor. Under current rules therefore, Settlors who have established excluded property Trusts with non-UK situs assets may continue to retain a benefit in such Trusts without any IHT exposure.
Surprisingly, despite the lack of generosity noted above in terms of existing IHT protections offered to existing non-UK resident Trusts, the Government has announced a grandfathering provision for excluded property trusts which were in existence prior to 30 October 2024. Relieving provisions state that the Trust’s non-UK assets will not be subject to the GROB rules although the Trust itself may come within the new regime for relevant property (triggering ten year anniversary charges and exit charges as indicated above). In certain circumstances this will mean that non-UK assets of existing Trusts created before 30 October 2024 will not be within the estate of the Settlor even under the new rules so charges to tax on the death of the Settlor (at 40%) will be avoided; even if the Settlor is a LTR when they die. It should be noted that any UK situs assets held prior to 30 October 2024 cannot benefit from the transitional GROB provision, even if the UK assets later become non-UK situs (following a sale, for example).
From 6 April 2025, provided the Settlor is not a LTR the trust retains its excluded property status on the basis excluded property status will be dependent on the LTR status of the Settlor (and the situs of the particular asset).
For Trusts established after 30 October 2024, when the Settlor becomes a LTR the trust property will no longer be excluded property and therefore will fall within the Settlor’s estate. If the Settlor dies whilst retaining a benefit in the Trust and at a point when the trust property is not excluded property the Settlor’s estate will be subject to IHT on the value of the trust property at 40%. This can be avoided if the Settlor is excluded from benefit but that is not always practical. It is also important to note that if a Settlor who is a LTR ceases to retain a benefit in the trust then they will be considered to make a potentially exempt transfer or PET which will become chargeable should the Settlor not survive seven years from the date of exclusion.
- How will Income and Gains in Trusts be treated from 6 April 2025?
Under current rules, UK resident Settlors of non-UK resident Trusts which are Settlor-interested can be personally assessed on income arising within the trust structure under the Settlements Code and the Transfer of Assets Abroad (TOAA) Code.
The Settlements Code applies specifically to income arising at Trust level but the TOAA Code applies more broadly and can catch income arising to underlying non-UK companies of a Trust.
Similar provisions apply for CGT purposes which can attribute capital gains arising to a Settlor-interested Trust or underlying company to a UK resident Settlor.
Crucially, under the existing regime, Settlors who are UK resident but non-domiciled are not subject to these charges because the foreign income and all capital gains are “protected” broadly speaking unless and until payments are made to the Settlor and close family members of the Settlor in certain circumstances.
From 6 April 2025, the existing trust protections for Settlor-interested Trusts will be removed. All UK source income received by a non-UK tax resident trust structure is currently assessable on the Settlor and this will continue to be the case after 5 April 2025. The significant change is that foreign income and all gains arising to a non-UK resident structure where the Settlor is UK tax resident (and is regarded as having an interest), will now be taxable on the Settlor unless they qualify for the FIG regime and they make a claim on their tax return.
This is a significant change. Whilst a Settlor has an interest for the income tax charging provisions if they or their spouse or civil partner can benefit, the CGT provision is more far reaching. A Settlor has an interest for the purpose of CGT if their children or grandchildren and their spouses and civil partners together with certain connected companies can benefit, whether or not the Settlor or a spouse or civil partner can benefit.
The rules governing the UK taxation of Beneficiaries of non-UK resident Trusts will continue relatively unchanged from 6 April 2025 except that UK resident but non-domiciled Beneficiaries will no longer be able to claim the remittance basis in relation to capital payments or benefits received outside the UK. Capital payments made to UK tax resident Beneficiaries who are not eligible for the FIG regime will continue to match to income and gains within non-UK tax resident structures and will be taxable in full when the capital payments match.
- How will the FIG Regime help to reduce any Tax Liability?
If a Settlor is eligible to claim the FIG regime (and provided they make a claim on their tax return) they will not be taxed on foreign income and gains arising in a Trust within the four year FIG period.
Foreign income and gains which arose to a non-UK tax resident trust structure pre 6 April 2025 will remain pooled and will be available to match against capital payments made to UK resident Settlors and Beneficiaries alike, unless previously matched.
Beneficiaries claiming under the FIG regime from 6 April 2025 will be able to receive income distributions and capital payments from non-UK resident trust structures without triggering a UK tax charge (regardless of whether or not the payment or benefit is received in the UK). An appropriate disclosure of the payment must, however, be made on the Beneficiary’s tax return to be eligible for the FIG regime. In the event a qualifying FIG taxpayer omits a disclosure of the capital payment, the capital payment will be regarded as matching to relevant income and capital gains of the non-UK resident trust structure and will be taxable as such. Capital payments made to Beneficiaries who claim relief under the FIG regime will not match to trust income and gains; it will not therefore be possible to “wash out” trust income and gains using such capital payments.
If a Beneficiary who is a close family member of the Settlor (including their spouse and minor children) receives a capital payment during a period when they are eligible to claim the FIG regime this could result in the capital payment being assessed on the Settlor unless they also make a valid claim under the FIG regime.
- What about the Motive Defences?
The existing provisions incorporate a motive defence which can avoid a tax charge in relation to foreign income under the Transfer of Assets provisions. In very broad terms the income will not be assessable on a Settlor or available to match to a capital payment or benefit received by a Beneficiary if the structure was not set up for the purposes of avoiding liability to UK tax. There is a further motive defence which prevents capital gains arising in a non-resident underlying company being apportioned to Trustee participators so that the gain is not assessable on a UK resident Settlor or available to match to capital payments or benefits made to UK resident Beneficiaries. Again, in very broad terms, the CGT motive defence applies if there was no intention to avoid CGT or Corporation Tax. There are no current changes to these motive defences and these could therefore provide a very useful relief from the ambit of the charges going forward. However, it should be noted that the proposed review of the personal anti-avoidance legislation referred to in paragraph 8 below may bring a change in this respect.
- How does the TRF impact on Non-UK Resident Trusts or other Overseas Entities?
In addition to any unremitted foreign income and gains held by individuals, taxpayers will also be able to designate unremitted foreign income and gains that they have received, benefitted from or which has been attributed to them from a non-UK resident Trust or overseas entity prior to 6 April 2025. This includes any unattributed foreign income and gains held within non-UK resident companies and Trusts provided they are matched with benefits or capital payment that they receive during the TRF period. In this way the TRF will allow Settlors/Beneficiaries to remit capital payments which have been matched to foreign income and gains at a reduced rate from 6 April 2025. This relief will be available for a period of three years and will be claimed in their tax returns.
The TRF will not be available for income distributions from non-UK resident Trusts or other non-UK resident entities after 5 April 2025. This is because the TRF has only been expanded to bring in amounts of deemed income or attributed gains that arise by matching benefits or capital payments such as capital distributions with pre-6 April 2025 foreign income or gains of that non-UK resident Trust or other offshore entity.
The TRF can be claimed on stockpiled foreign income and gains within offshore structures in the following circumstances:
- Where income and gains are matched to capital payments made to non-dom Beneficiaries before 6 April 2025 to which the remittance basis applied, and
- Where capital payments are received from offshore structures in the 2025/2026, 2026/2027 and 2027/2028 tax years, provided these capital payments match with foreign income and gains of the offshore structure which arose prior to 6 April 2025. To qualify for relief, the Beneficiary receiving the capital payment will need to have claimed the remittance basis in a tax year prior to 6 April 2025.
This will provide many Beneficiaries of non-UK resident Trusts who will not qualify for the FIG regime following 6 April 2025, with a limited window of opportunity to receive capital payments from their offshore structures at a significantly reduced rate of tax (12%/15%).
- Are there any other Changes which are Relevant?
Following the increase in the main rate of CGT from 20% to 24% the supplementary charge that applies to gains matched to distributions and benefits from non-UK resident Trusts means that the effective rate for CGT on historic matched gains could now be as much as 38.4%.
The onward gifting rules will be modified to align with the introduction of the FIG regime. Under the modified rules, if an individual receives a capital payment from an offshore trust during a period in which they are eligible to claim the FIG regime and, within three years, makes an onward gift to another individual who is UK tax resident, the onward recipient may be taxable on the capital payment, unless they are also able to claim the FIG regime.
As part of the Budget announcement the Government issued a Call for Evidence in relation to the Personal Tax Offshore Anti-avoidance legislation. The Call for Evidence closes on 19th February 2025 and covers the Settlements legislation, the Transfer of Assets Abroad legislation and the CGT legislation. A formal consultation will follow. It is possible that this will result in changes to rules that cover the taxation of Settlors and Beneficiaries. The Government has stated that changes will not be introduced until the start of the 2026/27 Tax Year at the earliest but the position will need to be kept under review.
- What do Trustees and Settlors need to do?
Trustees will need to review the residence status of Settlors to understand the impact of the new rules, from an IHT point of view in particular, Settlors will need to assess their position and understand the implications that a change in their residence status may have on Trusts set up by them, sometimes many years ago. Trustees, Settlors and Beneficiaries will need to work together in order to plan for the rule changes and understand whether any action should be taken before 6th April 2025 in order to minimise the impact of the changes on a structure. The rules may also present opportunities; for example, by making use of the FIG regime and TRF where available and appropriate.
For advice on any of these complex new measures, please contact Robert Drysdale or any member of the Wealth Planning Team at the earliest opportunity, certainly well before 5 April 2025.
