Background
Establishing an offshore trust for overseas assets has for many years been standard tax planning for people relocating to the UK. Provided the settlor established the trust before they became UK domiciled, the trust would remain outside of the scope of Inheritance Tax indefinitely. Therefore, trusts provided a valuable shelter from UK IHT.
By contrast, trusts set up by UK domiciled settlors were permanently within the scope of UK IHT. This had three consequences:
- IHT charges would apply on the trust’s assets at a rate of up to 6% every ten years
- A similar charge would arise on assets leaving the trust (known as an exit charge)
- If the settlor was a beneficiary of the trust, the assets within the trust could be taxed on their death
What’s changing?
From 6 April 2025, the IHT status of a trust will be determined by the tax status of the settlor. If the settlor is (or becomes) a long-term resident, the trust will enter the IHT regime. Consequently, the tax charges noted above could apply. This is different to the current tax rules is several important ways:
- A trust’s IHT status is no longer permanently fixed
- If a settlor ceases to be a long-term resident, an exit charge can arise
- The reservation of benefit rules can now possibly apply to trusts that were previously excluded from IHT
One of the most unpopular aspects of the new rules are that they a retroactive in effect. This means that they impact both new and existing trusts. Structures which were previously tax efficient for IHT purposes may therefore no longer be so.
The new rules do provided a limited element of “grandfathering” to trusts set up before 30 October 2024. Provided they do not hold UK assets, these trusts will not be subject to the “reservation of benefit” rules. The practical consequence of this is that no IHT would be due on the death of the settlor, even if they are a beneficiary of the trust.
What about other offshore structures?
Whilst the new rules primarily apply to trusts, there are other types of offshore structures that could potentially be impacted. In particular, the new rules will also impact non-trust structures that are treated as trusts for UK tax purposes. Examples could include usufructs and foundations.
What should I do?
Every structure is different and should be professionally reviewed. In carrying out a review, I would consider the following:
- Whether the settlor / founder of the structure is a long-term resident
- What the family’s future intentions are
- Whether the structure could be wound up without triggering significant tax charges
- How the treatment of the structure would change if the settlor(s) were to be excluded from benefit
