The UK Chancellor’s Budget confirmed a shift to a residence-based tax regime, impacting how offshore trusts are taxed in the UK. The proposals are a fundamental re-write of the current rules regarding trust structures, especially in relation to offshore and excluded property trusts.
Martin Scullion, expatriate tax partner and Daniel Iles, private client manager at Buzzacott comment on the changes that will come into force in April.
Income tax
Scullion said: “Under the current regime, non-dom settlors, or those deemed domiciled under the current long-term residency test, can retain an interest in an offshore trust whilst being UK residents, without being taxed on the trust’s foreign income as it arises. The foreign income becomes taxable only when distributions or benefits are provided to UK-resident beneficiaries.
Iles added: “Additionally, those that are still non-UK domiciled at the time the distribution/benefit is received and it is retained offshore, can claim the remittance basis to prevent a charge to UK income tax until such a time it is remitted.”
“From 5 April 2025, UK-resident settlors of settlor-interested trusts will be taxed on all income as it arises. The Foreign Income & Gains (FIG) regime may apply, exempting such income within your first four years of UK tax residence, depending on your previous UK residence history.”
Capital gains tax
Scullion said: “Settlors with an interest in offshore trusts are currently only subject to gains realised by the trustees as they arise, if they are both UK-resident and UK-domiciled, or deemed domiciled under the formerly domiciled resident test. For non-UK residents and/or non-UK domiciled, gains ‘roll-up’ within the trust and are taxable when matched to a capital distribution or benefit.”
“From 6 April 2025, gains realised by offshore trustees will be taxable directly on UK-resident settlors with an interest in the trust. The FIG regime may exempt such gains within the first four years of UK tax residence.”
Iles added: “This, combined with the income tax changes, means UK resident settlors with an interest in offshore trusts could be taxed on all income and gains as they arise – a stark contrast to the current rules.”
Inheritance tax
Scullion said: “Until 5 April 2025, a trust’s IHT status is determined by the domicile of the settlor when the assets were settled. For trusts settled whilst neither UK-domiciled, nor UK deemed domiciled, the assets are currently excluded property, provided they are not UK assets or assets deriving value from UK land and property. Any such assets will be outside the scope of UK inheritance tax indefinitely.”
“Under the new rules, the IHT status of the trust will depend on historic residence status. After being a UK resident for at least 10 of the previous 20 tax years, you will be considered a ‘long-term resident’ and the trust will enter the relevant property regime and all assets will be within the scope of UK IHT, with a charge of up to 6% on distributions of capital and each 10-year anniversary of the settlement.”
Iles said: “If you cease to be a long-term resident, by being non-UK resident for a certain number of years, the trust will be removed from the relevant property regime, triggering a 6% IHT exit charge. Trust’s assets could switch in and out of the scope of IHT in accordance with your long-term residence status.”
“The Gift with Reservation of Benefit (GWROB) rules will also apply if you retain an interest in the trust, leading to IHT charges of up to 6% and the inclusion of the trust’s value in your estate for IHT at 40%. There is a concession for trusts created prior to 30 October 2024 whereby the GWROB rules will not be applicable to non-UK assets. For new trusts, excluding yourself from benefit is crucial to avoid double IHT charges”
Planning points
Scullion said: “Gains and income realised within offshore trusts prior to 6 April 2025 will stay in ‘protected pools’ and only incur UK tax when matched to distributions and benefits. The draft legislation extends the Temporary Repatriation Facility to these distributions, allowing them to be taxed at 12% if the UK resident recipient has previously claimed the remittance basis, instead of up to 45% and 38.4% on income and gains, respectively.”
Iles added: “The proposals allow a four-year window where foreign income and gains in the first four years of UK tax residence are not subject to UK tax, even if remitted. UK resident settlors with offshore trusts won’t be subject to UK tax on the foreign income and gains arising to trustees in the first four years of residence.”
“It’s crucial to establish the IHT position of assets held in offshore trusts. A taxable event could occur on or after 6 April 2025, and trustees must ensure they are aware of their UK tax obligations, as HMRC tends to penalise offshore omissions more harshly.”
