The UK government confirmed in its Autumn Budget on 30 October 2024 that, from 6 April 2025, it is to replace ‘domicile’ as a connecting factor for liability to applicable UK taxes, including inheritance tax (IHT), and adopt a residence-based regime instead.
Accordingly, as from 6 April 2025, individuals who have been UK resident for at least 10 out of the past 20 tax years – for example, a person who was UK resident for 11 tax years from 6 April 2014 to 5 April 2024 – will be classified as a ‘long-term resident’ (LTR) and exposed to IHT on their worldwide assets. Once an individual gains LTR status it will generally take 10 tax years of non-UK residence to lose it.
At the same time, the status of trusts established by non-UK domiciled individuals with non-UK (overseas) assets – generally termed as ‘Excluded Property Trusts’ (EPTs) for IHT purposes – will no longer reflect the domicile status of the settlor when the trust was established or when assets were added to the trust. Instead, it will follow the LTR status of the settlor at the time of the relevant IHT event.
Two separate IHT regimes apply to trusts within the scope of UK IHT: the ‘relevant property regime’, which imposes a maximum 6% charge on every ten-year anniversary of the trust’s establishment and a further pro rata ‘exit’ charge when property leaves the trust; and the ‘gifts with reservation of benefit’ (GROB) rules, which currently apply only to UK situs assets held in a trust will.
Previously, the general rule was that Excluded Property Trusts – typically created as discretionary or fixed interest trusts – provided a permanent shelter from UK IHT, even if the settlor later became UK domiciled or deemed domiciled. As a result, EPTs have been the cornerstone of IHT planning for non-UK domiciled individuals for decades.
As of 6 April 2025, a trust settled with overseas assets by an individual who is not an LTR will be an Excluded Property Trust (and therefore exempt from the relevant property regime indefinitely), even if all the beneficiaries are long-term UK residents. And if the settlor is not an LTR on death then the trust can continue as an EPT.
If the settlor subsequently becomes an LTR, however, the trust will lose its Excluded Property Trust status. And if the settlor dies as an LTR then the trust fund will further be exposed to IHT – just like any other overseas assets held in their free estate – unless the settlor has been specifically excluded as a trust beneficiary before becoming an LTR.
This is because, at present, Excluded Property Trusts are exempt from the GROB regime. From 6 April 2025, however, this exemption will only continue to be applied for EPTs that were established and fully funded before 30 October 2024. These EPTs will therefore remain outside of IHT even if the settlor becomes an LTR. The exemption does not, however, extend to the relevant property charges.
For EPTs established on or after 30 October 2024, the exemption from the GROB will no longer apply. Settlors of such EPTs who are at risk of becoming LTRs will need to be excluded as beneficiaries to ensure the trust continues to provide a shelter from IHT.
Excluded Property Trusts for non-UK residents
Excluded Property Trusts may still be an attractive planning option for non-UK residents who have connections with the UK, such as children living in the UK who have become LTRs (it is worth noting that years of education count as years of UK residence for the purposes of the LTR rule).
An Excluded Property Trust provides two key tax advantages over making direct lifetime gifts or bequests to such individuals:
- Trustees of non-UK tax resident trusts should never be at risk of becoming an LTR so the assets that are held within the EPT will remain outside of the UK IHT regime provided that the settlor does not become an LTR. The status of beneficiaries who are not settlors does not affect the IHT position of the trust at all.
- Foreign income and gains accruing to the EPT will not be taxed in the UK provided that the settlor does not become an LTR. If the assets were held by a UK resident individual, they would be taxed on that individual.
Excluded Property Trusts for UK residents
From 6 April 2025 an Excluded Property Trust can be used by any individual who is not an LTR, regardless of their domicile. EPTs may therefore also present attractive planning opportunities for UK residents who currently do not fall within the definition of LTR but who are likely to do so in the future.
Under rules introduced in April 2017, the foreign income and gains of ‘protected settlements’ – trusts created and funded before a settlor became domiciled or deemed domiciled in the UK – would not be taxed on settlors of settlor-interested trusts as they arose. From 6 April 2025, however, these protections will only be available for four years to qualifying settlors under for the new Foreign Income and Gains (FIG) regime, which replaces the previous ‘remittance basis’ regime.
Excluded Property Trusts will now therefore be at risk of being transparent for income tax (IT) and capital gains tax (CGT) purposes, but the position will depend on the type of EPT structure used, when it was established, and whether any tax planning has been done, as follows:
- Excluded Property Trusts established and funded before 30 October 2024
Assets held in these EPTs will remain outside of the settlor’s estate for UK IHT purposes even if the settlor becomes an LTR. These EPTs will fall within the ‘relevant property regime’ when the settlor becomes an LTR and the ‘protected settlement’ status for IT and CGT purposes will be removed from 6 April 2025 unless the settlor is a qualifying new resident under the new FIG regime, which is only available for a maximum of four UK tax years.Planning may be available to defer UK IT and CGT on income and gains where assets are held in an overseas company below the level of the EPT.For IT, trust income should not be attributed to the settlor provided both the settlor and their spouse are excluded as beneficiaries; they must also avoid making loans to or receiving loans from the structure.
In respect of CGT, exposure can be minimised by limiting the range of investments to those which fall within the IT attribution rule or by holding assets through collective investment vehicles.
- Excluded Property Trusts established and funded from 30 October 2024 but before 6 April 2025.
Assets held within these EPTs will become subject to UK IHT when the settlor becomes an LTR unless the settlor is excluded as a beneficiary before this occurs. These EPTs will fall within the ‘relevant property regime’ when the settlor becomes an LTR and the ‘protected settlement’ status for IT and CGT purposes will be removed from 6 April 2025 unless the settlor is a qualifying new resident under the new FIG regime, which is only available for a maximum of four UK tax years.Planning may be available to defer UK IT and CGT on income and gains, as in Type 1 EPT above. - Excluded Property Trusts established from 6 April 2025.
The tax treatment will essentially be the same as for the Type 2 EPT above. The only difference is that until 5 April 2025 domicile will still be used as the criterion to determine whether a settlor can make an EPT; from 6 April 2025 it will be long-term UK residence.
Urgent Actions
Time is short. To optimise the tax efficiency of your trust structure under the new regime, given that the IT and CGT protections are to be revoked, urgent restructuring may be required prior to 6 April 2025.
You may also be able to access a special ‘repatriation facility’ from 6 April 2025, under which certain trust distributions will benefit from a reduced rate of tax (12% for the 2025/2026 and 2026/2027 tax years and then 15% for the tax year 2027/28) if all the conditions are met.
It is not necessary to physically move the funds to the UK during this period. The tax will be due on the full amount of FIG designated in the year the election is made, not when the distributions are remitted to the UK. This facility will close on 5 April 2028.
The TRF is also available to UK resident individuals – settlors or beneficiaries – who receive a benefit from an offshore trust structure, where the benefit can be matched to pre-6 April 2025 FIG. This should offer access to trust income and gains that previously may have been subject to punitive tax rates when received from the trust and remitted to the UK.
Sovereign’s pre-6 April 2025 planning
Excluded Property Trusts are bespoke tax planning arrangements that should be tailored to an individual client’s circumstances and planning objectives. There may also be transfer tax issues if non cash assets are to be settled.
If you require any urgent pre-6 April 2025 planning, Sovereign’s tax team can be engaged to work on the advice that must underpin any planning in this area. For UK residents the advice must come with a supporting tax counsel opinion. Advisory fees are quoted on a case-by-case basis which can generally be estimated following the initial consultation.
