The October 2024 Budget brought with it sweeping reforms to the taxation of non-UK domiciled individuals and their associated offshore trust structures. Effective from 6 April 2025, these changes represent a substantial departure from the previous regime and significantly alter the UK tax landscape for affected families and trustees. The new rules impact the treatment of income, capital gains, and inheritance tax, particularly for UK resident individuals who had historically benefited from the remittance basis and special trust protections.
Introduction of the Long Term Resident (LTR) rule
The concept of “domicile” has been removed from the UK tax regime with effect from 6 April 2025. Instead, a new LTR rule brings within the scope of UK inheritance tax any individual who has been UK resident for at least 10 out of the previous 20 tax years. This has profound implications for settlors of non-UK resident trusts, even those settlors who remain non-domiciled under general law but now fall within the UK tax net by virtue of their residence history.
Where settlors retain a benefit in, or access to, trust assets or income (so-called settlor-interested trusts), these structures may no longer benefit from previously available protections and could now be fully exposed to various aspects of UK taxation.
Key tax changes affecting settlor-interested non-UK trusts
Before 6 April 2025:
- UK taxation was limited to UK source income and capital gains in respect of interest in UK land.
- Foreign income and most capital gains (including gains on most UK securities) were typically not subject to immediate UK taxation but could trigger UK tax where a benefit was conferred to a UK resident individual.
- UK IHT applied only to UK situs assets, and UK residential property, even if held indirectly via non-UK entities.
From 6 April 2025:
The exposure to UK taxation could increase significantly, especially for trusts where the settlor is the LTR:
- Trust income and capital gains may now be taxed on the settlor as they arise.
- UK resident beneficiaries may still be taxed under the benefits charge when receiving distributions or benefits.
- The trust fund may fall within the relevant property regime and be subject to periodic IHT charges of up to 6%, as well as exit charges.
- For trusts created after 30 October 2024, IHT at up to 40% may apply on the death of the settlor under the Gift with Reservation of Benefit rules. However, grandfathering protections apply to pre-existing trusts, provided all assets were settled prior to that date.
Mitigation Strategies for Affected Settlors
To reduce exposure, settlors may consider irrevocably excluding themselves from any benefit under the trust, thereby removing its “settlor-interested” status. It is critical that such exclusions extend to the settlor’s spouse and minor children. Notably, for capital gains tax purposes, settlor status may still apply if children or grandchildren are beneficiaries. Consequently, legal and tax advice is essential to ensure the exclusion is effective and does not trigger unintended tax consequences.
Any decision to restructure should be underpinned by a thorough assessment of the trust’s income and gains history, asset profile, and the broader family objectives. A holistic analysis and formal UK tax advice are essential to avoid any adverse tax implications arising from premature or ill-considered changes.
Longer Term Considerations
For individuals who are already LTRs or expect to become so in due course, options may include restructuring or winding up the trust. Making distributions, particularly where the tax treatment for beneficiaries remains aligned with pre-existing rules, may be a pragmatic strategy. Distributions matched to income pools continue to be taxable at the beneficiary’s marginal rates.
Further, those who previously claimed the remittance basis may benefit from the Temporary Repatriation Facility (TRF), available from 6 April 2025 to 5 April 2028. The TRF allows eligible individuals to bring historically untaxed offshore trust income and gains into the UK at reduced flat tax rates of:
- 12% in the 2025/26 tax year
- 12% in the 2026/27 tax year
- 15% in the 2027/28 tax year
This compares favourably to the standard top rates of 45% (income tax) and 38.4% (CGT, including the supplementary charge), offering a potentially valuable opportunity to repatriate accumulated offshore income and gains at a fraction of the usual tax cost.
See further information on TRF eligibility, mechanics, and planning points
Next steps for Trustees and Families
We recommend that affected trustees and family members:
- Assess their current UK tax exposure under the new regime;
- Understand how their exposure is likely to evolve in future years;
- Explore whether planning can be undertaken to reduce or eliminate this exposure, particularly during the TRF window where flat rates may apply on exit or restructuring events.
If these changes may affect you or your clients, please contact our private client tax team to arrange an initial discussion. We would be pleased to help assess your position and support you in navigating these significant reforms.
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