Several changes to inheritance tax (IHT) will be implemented gradually, beginning with the transition to a residence-based system effective from April 6, 2025.
The UK Autumn Budget 2024 has introduced significant changes affecting the taxation of Trusts settled by non UK domiciled and in particular in terms of inheritance tax.
Under the current rules, non-UK assets in a settlement are “excluded property”, and outside the scope of IHT, if the settlor was non-UK domiciled (and not deemed domiciled in the UK) at the time the assets become comprised in the settlement.
From the 6th April 2025, the excluded property status of trusts will depend instead upon whether the settlor is a long-term resident or not at the date of charge. This means that settled assets will come in and out of IHT charge based on the settlor’s long term residence status at the date of the charge. An individual is long-term resident when has been resident in the UK for at least 10 out of the last 20 tax years and then remain in scope for between 3 and 10 years after leaving the UK (the time the individual remains in scope after leaving the UK will be shortened where they have only been resident in the UK for between 10 and 19 years). Therefore, the test for whether non-UK assets are in scope for IHT will be whether an individual has been resident in the UK for at least 10 out of the last 20 tax years immediately preceding the tax year in which the chargeable event (including death) arises. Where the settlor of a trust has died before 6 April 2025, whether non-UK assets are excluded property will be based on the old (i.e. current) test, namely the settlor’s domicile at the time the property became comprised in the settlement. Where the settlor dies on or after the 6 April 2025, the excluded property status of the trust will be fixed by the settlor’s long term residence status at the date of death.
Two different regimes may apply to Trusts settled by long-term UK residents which are brought within the scope of IHT. There are:
- the UK’s 10 Year anniversary/exit charges Regime (also known as the “Relevant Property Regime“) and
- the “Gift with a Reservation of Benefit” (GWR) rules.
The same trust assets can be caught by both the 10 Year Charging Regime and the GWR rules, potentially resulting in double taxation.
For settlements within the Relevant Property Regime, from 6 April 2025 non-UK settled property will no longer be excluded property if the settlor is long-term resident and will be excluded property if the settlor is not long-term resident. For settlements with a non-domiciled settlor who is long-term resident, this will mean that excluded property becomes relevant property on 6 April 2025. Charges will arise on any exits after that date or when each ten-year anniversary of the trust arises. The calculation of the charge will reflect the number of years that the non-UK property was excluded property. From 6 April 2025, where a settlor ceases to satisfy the long-term residence test, non UK relevant property becomes excluded property and this will result in an exit charge.
Under the Relevant Property Regime, trust assets are subject to IHT charges at up to 6 per cent of their value:
- On each ten-year anniversary of the creation of the trust; and
- When capital is distributed from the trust; and
- When settlor ceases to satisfy the long-term residence test
A Gift With Reservation (GWR) is where an individual (the donor) makes a gift and continues to be able to benefit from the property given away. Where property is gifted into a settlement and the donor retains a benefit in the settled property at the date of death, the property comprised in the settlement at death is deemed to be part of the donor’s estate for IHT purposes. Under the old (i.e. current) rules, there is no charge under the GWR rules where the gifted property meets the definition of excluded property at the donor’s death. For non-UK assets gifted to a settlement, the test for excluded property is the settlor’s domicile at the time the assets are added to the trust. This means that assets added to a trust when a person was non-domiciled are not currently brought into scope of the GWR provisions, regardless of the donor’s domicile position on death.
Under the new GWR rules, where a settlor is a long-term UK resident (i.e. has been in the UK for more than 10 tax years), worldwide trust assets will be treated as the settlor’s on their death for IHT purposes (currently subject to 40% IHT).
However (and in a softening of previous announcements) these rules will not apply to trusts funded by non-domiciled individuals before 30 October 2024, except in relation to UK assets (UK assets will still be subject to 40% IHT on the settlor’s death).
The above means that:
- Trusts settled before 30 October 2024 will continue to provide protection from IHT on the settlor’s death even if the settlor remains a beneficiary (i.e. protection from the GWR rules). However, trusts will now be exposed to the 10 Year Charging Regime from the point at which settlors become long-term UK residents (i.e. have been resident for more than 10 years). Additions or new settlements made on or after 30 October 2024 will be subject to the GWR rules as they apply in accordance with the new long-term residence rules.
- Non-doms who have been UK resident for between 10 and 15 tax years (i.e. for those non-doms who will become long-term UK residents on 6 April 2025 but who are not yet deemed dom) who settle non-UK assets after 30 October 2024 but prior to 6 April 2025 into a family trust from which they cannot benefit personally would be protected from IHT on the settlor’s death (although the trust would still fall within the 10 Year Charging Regime once the settlor becomes a long-term UK resident).
- Non-doms who have been UK resident for fewer than 10 tax years, could continue to create settlor-excluded trusts (which will not be taxed on their death) after 6 April 2025 until they become long-term UK residents.
If you have specific scenarios or questions, please feel free to contact us at info@veragroupltd.com or call +44 (0) 20 7434 6000