UK Tax Reform: The Impact For Offshore Trusts

This article summarises the changes to take effect from 6 April 2025 and focusses on the impact for offshore trusts and relevant planning points.

Income Tax And Capital Gains Tax

Remittance basis abolished?

Currently, UK resident non-doms may choose to be taxed on the ‘remittance basis’ so that their UK income and capital gains are taxed, but their foreign income and capital gains (FIGs) are not taxed in the UK unless and until they are ‘remitted’ to the UK. Under the new rules, from 6 April 2025, UK resident taxpayers may no longer claim the remittance basis. However, UK taxpayers who previously claimed the remittance basis (RBUs) will still be subject to tax on the remittance basis in relation to any unremitted FIGs.

New 4-year regime

In place of the remittance basis, a new four-year special tax regime will be introduced, under which qualifying new UK residents (QNRs) will be relieved from tax on their FIGs for their first four years of UK residence, regardless of whether such FIGs are remitted to the UK. After this four-year period, all income and gains will be taxable in the UK. All individuals becoming UK resident after at least 10 consecutive tax years of non-UK residence will be eligible. QNRs will need to claim relief in their tax return, and itemise and quantify each type of FIG for which relief is claimed. 

Trust protections lost

The ‘trust protections’ introduced in April 2017 will cease to apply from 6 April 2025. Broadly, these protections shelter a UK resident, foreign domiciled settlor of an offshore trust from tax that would otherwise be charged on the settlor by reference to FIGs realised within the structure. Such protection currently applies even where the settlor is deemed domiciled in the UK.  

Under the new rules, from 6 April 2025, these protections will be removed wholesale, and, in default, UK resident settlors of such structures will be taxed by reference to FIGs received and realised within the trust. Notably, however, QNR settlors will not be taxable on FIGs arising within their offshore trust structures, subject to their making the relevant claims, though they will be taxable on any UK income and gains of such structures.

Distributions from offshore trusts

Under current rules, UK resident beneficiaries can be taxed on capital distributions and benefits received from offshore trusts, subject to the remittance basis, where they are ‘matched’ with accumulated trust income and trust gains, giving rise to deemed income or gains for the beneficiaries.

Under the new rules, income and gains arising in many offshore trusts from 6 April 2025, will no longer be ‘matched’ with benefits to UK resident beneficiaries. However, capital distributions and benefits to UK resident beneficiaries (including the settlor) may, in certain circumstances, be taxed by reference to income and gains of the trust which arose before 6 April 2025. As a result, there are potentially two layers of tax for a UK resident settlor beneficiary: firstly, by reference to post-5 April 2025 income and gains of the trust and, secondly, on capital distributions, by reference to pre-5 April 2025 income and gains of the trust.

In most cases, trust distributions to QNR beneficiaries should be relieved: a distribution of income will be free of tax and a distribution of capital received by QNR beneficiaries should, in most circumstances, also be tax-free, but care must be taken. A capital payment made to a QNR beneficiary will be disregarded altogether for the purposes of the gains ‘matching’ rules if the relevant claim is made. This means that there will be no ‘matching’ with trust gains, whether foreign or UK, at all. For the income ‘matching’ rules, however, the position is different: a QNR beneficiary may be taxed by reference to a capital distribution from an offshore trust where either the distribution is ‘matched’ with UK trust income, or the distribution is not completely ‘matched’ with income while the beneficiary is a QNR and is ‘matched’ with income once the UK beneficiary is no longer eligible for the QNR regime (having been UK resident for more than four years). Accordingly, there is scope for inadvertent tax charges for UK beneficiaries.

Onward gifts

The current ‘onward gift rules’ will be extended: in broad terms, if a QNR beneficiary receives a capital distribution and transfers the proceeds to a non-QNR UK resident, the recipient will be taxed as if the transfer were itself a trust distribution.

UK Inheritance Tax (IHT)

Residence-based test for individuals

Under current rules, the IHT exposure for a non-UK domiciled and non-deemed domiciled individual is restricted to UK assets and non-UK situated assets that are connected with UK residential property (UK situated assets) and does not extend to other non-UK assets.

Under the new regime, domicile will no longer be a connecting factor for IHT for individuals or trusts. Instead, an individual’s exposure to IHT will be determined by whether the individual qualifies as a ‘long-term resident’ (LTR). LTRs will be exposed to IHT with respect to all assets, whereas non-LTRs will generally be exposed to IHT with respect to UK situated assets only. By default, an individual will be an LTR if they have been UK resident for at least 10 of the previous 20 UK tax years. Therefore, from the 11th year, the individual will be exposed to IHT on worldwide assets even if they are not UK resident in the 11th year. Accordingly, an individual will need to leave the UK before the end of their ninth year of UK residence, to avoid this exposure.

IHT tail

Furthermore, there will be a ‘tail’ of IHT exposure when an LTR ceases to be UK resident. In many cases the ‘tail’ will be 10 tax years, although the tail will be shorter for those who have been resident for fewer than 20 tax years before leaving the UK. Those UK resident for between 10 and 13 years will have LTR status for three tax years from the date of departure from the UK. This will then increase by one tax year for each additional year of residence. So, if a person was resident for 16 out of 20 tax years on leaving, they would remain subject to full IHT exposure for six years.

IHT treatment of trusts

Whether non-UK assets held in a trust are within the scope of IHT will depend primarily on whether the settlor is an LTR at the time the relevant IHT event occurs or, if the settlor has died, whether the settlor was an LTR on their death. Accordingly, non-UK assets in a trust will move in and out of the IHT net in the same way as assets owned by the settlor personally. The most relevant occasions of IHT charge after the rules change from 6 April 2025 are likely to be:

• When assets are gifted to trust: a charge at 25 per cent if the settlor is an LTR at that point and pays the tax (if the settlor dies within seven years of the gift, there may be further tax).
• 10-year anniversaries and capital distributions from the trust: a charge of up to six per cent, if the settlor is an LTR at these points, even if the settlor is excluded from benefitting from the trust. Furthermore, if the settlor is an LTR on death, the trust’s exposure to these IHT charges will apply for the lifetime of the trust.
• On the settlor ceasing to be an LTR (ie when the IHT ‘tail’ ends): a charge of up to six per cent, depending on the length of time since the last 10-year anniversary.
• On the settlor’s death, if they have reserved a benefit in the trust: a 40 per cent charge.
• Where the settlor retains a benefit in settled property at the date of death, the settlement assets are deemed to be part of the settlor’s estate for IHT purposes. This will capture trusts where the settlor is a beneficiary or can revoke the trust.
• There is an exemption for certain trusts from this IHT exposure: those funded before 30 October 2024 with non-UK assets which under existing rules are exempt from IHT. Given how valuable this exemption may prove, particular care will be needed to preserve, where appropriate, the IHT benefits of any such trusts.
• When certain types of ‘life interest’ trusts terminate: a 40 per cent charge, if the settlor or the income beneficiary are LTR at the relevant time. Again, there is an exemption for certain types of ‘life interest’ trusts where those trusts had IHT-exempt status before 30 October 2024.

Transitional Reliefs For Former RBUs And Offshore Trusts

There are two transitional reliefs under the new regime. The most relevant to offshore trusts is the temporary repatriation facility (TRF). During the TRF window (ie the three tax years commencing 2025/26) former RBUs can treat FIGs as remitted to the UK and secure a low tax rate (12 per cent in the first two years and 15 per cent in the third and final year). There are effectively two parts to the TRF:

• The first deals with unremitted pre-6 April 2025 FIGs of former RBUs which are represented by existing assets.
• The second deals with amounts derived from post-5 April 2025 trust distributions which may be made to former RBUs within the TRF window.

If there is a desire to extract funds tax-efficiently from an offshore trust, a current RBU, who will not be eligible for the QNR regime, may well want to receive an income distribution before 6 April 2025 and utilise the first part of the TRF in 2025/26 to designate that income and pay the 12 per cent tax rate. Using the second limb of the TRF for post-5 April 2025, trust distributions may also be an option in certain circumstances, but there will be scope for inadvertent tax due to how the matching rules will work for post-5 April 2025 capital distributions; expert advice and extreme care will need to be taken.

However, careful consideration will need to be given to the impact of the TRF in the context of the UK’s numerous double tax treaties. Claiming credit for foreign tax paid in respect of funds which are the subject to the TRF election will seemingly not be possible.

Further Planning Points For Offshore Trusts

Offshore trusts will continue to offer succession planning, asset protection and family governance advantages even after 5 April 2025. Furthermore, trusts will continue to provide a degree of tax protection in certain circumstances. Some of the planning points to consider include:

• Whether changes are required to the investment policy of the trust or the nature of the trust fund to mitigate the settlor’s UK tax position; for example, this could involve the use of offshore life insurance bonds and offshore funds.
• Whether to rebase trust assets before 6 April 2025. Depending on the circumstances of the trust, the gains that are generated on that rebasing may not be taxed on the settlor or other beneficiaries unless and until they receive a benefit from the trust. The rebasing should reduce the amount of capital gains that can be taxed on a non-QNR settlor on disposals of trust assets after 5 April 2025.

For non-doms who have been UK resident for between 10 and 15 tax years, there is a window of opportunity to settle non-UK assets prior to 6 April 2025 on a trust from which they are excluded from benefit. This should provide protection from IHT on the settlor’s death, although the trust would be subject to the ongoing IHT charges explained above. For non-doms who have been UK resident for fewer than 10 tax years, the opportunity to create such trusts will continue to be available after 6 April 2025 until they become LTRs.

Non-QNR settlors, who will be taxed directly on trust income and gains of an offshore trust from 6 April 2025, may wish to consider requesting substantial distributions or winding up trusts before 6 April 2025 and leaving the distribution outside the UK, or making use of the TRF to use the funds in the UK at the reduced rate of tax. Where the settlor will be eligible for the QNR regime from 6 April 2025, it may make sense, depending on the circumstances, to delay trust distributions to the settlor until that date.

Settlors should consider whether it is feasible to exclude themselves (and their spouse or civil partner) from future benefit from the offshore trust to avoid direct taxation of trust income. However, expert advice is required to ensure that the exclusion is effective. In most cases, it will be unrealistic to avoid the capital gains attribution rules, because that would require the exclusion of a much wider class of persons, including the settlor’s children, grandchildren and their spouses.

Matthew Radcliffe TEP
Matthew provides advice to offshore, onshore and multi-jurisdictional individuals, families, trustees and beneficiaries regarding taxation, trust and estate planning matters. He is familiar with devising and coordinating tax and estate planning across a number of jurisdictions and in particular specialises in tax and estate planning where there are US, UK and Canada cross-border issues. He also has expertise in advising on the UK tax treatment of foreign entities including foundations and trusts and UK residential property holding structures.