Autumn Budget 2024: Offshore Trust Changes and its Impact

This article highlights some of the key changes that will impact offshore trust structures, including the settlor, beneficiaries and trustees.

Trust distributions and the interaction with the foreign income and gains (FIG) regime

From 6 April 2025 a new Foreign Income and Gains (‘FIG’) regime will be introduced, which is explained in Alice Pearson’s article. In terms of how this new regime will interact with offshore trust distributions, the key headlines to note are as follows:

• Where a beneficiary receives an income distribution or has a life interest in a settlement, full relief will be available from UK tax on the foreign income arising to the beneficiary if they make a claim for the 4-year FIG regime.
• Similarly, if a beneficiary receives a capital distribution or benefit (e.g. an interest free loan) which matches to ‘relevant foreign income’ of the trust this will also not result in a UK tax charge if a FIG claim is made. Note, however, if the benefit is unmatched as there is insufficient relevant income or stockpiled gains within a structure, these may match at a later date and result in a UK tax charge for the beneficiary if the 4-year FIG period has ended.
• Trustees should note that capital distributions and benefits will not be treated as reducing the relevant income and stockpiled gains pools.
• Where the FIG regime is not available, income distributions will continue to be taxed in the normal way. Similarly, capital payments and benefits will match to income and gains in the usual way.
• An additional important point to note for settlors in particular is that pre-2025 income that previously met the conditions for ‘protected foreign source income’ (PFSI) will now be assessable.

Settlor interested trusts

As previously covered in this article here, it has now been confirmed that from 6 April 2025 Trust Protections will no longer apply. This means that where a trust is settlor interested (broadly where the settlor, their spouse or minor children or grandchildren can benefit), unless the settlor qualifies for the four-year FIG regime, foreign income and gains arising in the trust or underlying company (whenever established) will be assessed on the settlor as they arise.

Where income is attributed to the settlor, there will be a right to recover the tax paid from the trust / underlying company without this itself being treated as a benefit and triggering a further tax charge.

Inheritance Tax (IHT) and trusts

Currently, non-UK assets comprised in a settlement are excluded property and outside the scope of IHT if the settlor was non-UK domiciled at the time the trust was established, and at the time of any future additions.

From 6 April 2025 the excluded property status of non-UK settled assets will not be fixed on the settlor’s domicile at the time assets are added to the trust. Instead the assets will only be excluded if at the time of a charge the settlor is not a ‘long-term resident’. An individual is a long-term resident if they have been resident in the UK under the Statutory Residence Test (SRT) for at least 10 out of the previous 20 tax years preceding the tax year in which the chargeable event arises.

There are two key points to note here:

1. If the settlor is deceased or dies before 6 April 2025, the current IHT rules apply and non-UK assets will continue to be excluded property provided the settlor was non-domiciled at the time the trust was established.
2. If the settlor dies after 5 April 2025, the IHT status of the trust will depend on the long-term residence status of the settlor upon death.

It should also be noted that for assets of certain interest in possession trusts that are treated as being within the life tenant’s estate for IHT purposes, the assets of the trust will only be excluded property if neither the settlor nor the life tenant are a long-term resident.

Impact for trustees

Currently, the trustees of excluded property trust are only subject to UK IHT to the extent that the trust directly holds UK assets or UK residential property (regardless of how this is held).

From 6 April 2025, the IHT status of the trust will depend on whether the settlor is a long-term resident and, as a result, a trust could move in and out of the scope of IHT depending on the settlor’s movement.

The maximum rate of IHT payable by trustees on a 10-year anniversary is currently 6%. However, relief is availble for periods where the trust assets are outside the scope of UK IHT resulting in a reduced rate of IHT. Similarly, the rate of IHT payable when capital is distributed between anniversary dates (an ‘exit’) may be reduced. It is important to note that if the settlor ceases to be a long-term resident that this will result in an ‘exit charge’ for the trustees on the value of the non-UK assets. Trustees may not have retained a close relationship with the settlor as time elapses and this may present some practical problems for monitoring and reporting

Impact for settlors

Where assets are given away but the donor is still able to benefit from them, these remain within the donor’s estate for IHT purposes under the Gifts With Reservation of Benefit (GWR) rules. That said, currently where non-UK assets have been settled onto trust by a non-UK domiciled settlor who can continue to benefit from the trust, the GWR rules do not apply, regardless of the donor’s domicile position on death.

Where non-UK assets comprised in a settlement were excluded property before 30 October 2024 these will continue to fall outside the scope of the GWR rules, so while the trustees may be liable to IHT if the settlor is a long-term resident this will prevent a double charge to IHT. However, if additions or new settlements are established on or after 30 October 2024 then the non-UK property will be subject to the GRW rules, so if the settlor is a long-term resident, the non-UK assets will form part of his/her estate for IHT purposes.

Below are some examples of how the new rules will apply to trustees and settlors.

Example 1

Bernado established a trust with £10m of non-UK assets in December 2020 when he was UK resident (resident from 2019) but non-UK domiciled. He remains resident in the UK until he dies in 2045.

• There is no charge to IHT when excluded property is added to the trust as Bernado is non-UK domiciled at this time.
• As the non-UK assets comprised in the settlement were excluded property before 30 October 2024, the GWR rules do not apply, and the assets will not form part of his estate on his death.
• Bernado is a long-term resident from 2029 and in December 2030 there will be a 10-year anniversary charge of up to 6% of the value of the assets comprised in the settlement. However, relief will be available for the period where the trust assets were outside the scope of UK IHT. Bernado has only been a long-term resident for 1/10 years so a maximum rate of 0.6% applies.
• The trustees will be subject to a further IHT charge at 6% every tenth anniversary going forward as Bernado remained in the UK and died whilst a long-term resident.

Example 2

Now let us assume that Bernado left the UK in 2032.

• There is no charge to IHT on the creation of the trust and the assets will not form part of Bernado’s estate under the GWR rules.
• There will again be a charge to IHT for the trustees in 2030, with relief for the period the trust assets are outside the scope of IHT. Although Bernado leaves the UK in 2032, he will still be a long-term resident until 2042, and so the trustees will still be subject to a further 6% charge in 2040.
• In 2042 Bernado will cease to be a long-term resident and there will be an exit charge albeit at 2/10 x the standard rate i.e. 1.2%.
• Thereafter, as Bernado is not a long-term resident at the date of his death in 2045, the trust will fall outside of the scope of IHT (assuming it continues solely to hold non-UK assets).

Rochelle Comyn provides a full summary of the IHT implications of the new long-term residence rules on individuals.

Understandably, the changes will raise questions and concerns for UK residents who have established excluded property trusts and who will fall into the new ‘long-term resident’ regime. If you are moving to the UK you will need to take advice on the position for any trusts already in existence at an early stage.

Contact Mercer & Hole

If you are affected by these changes, please do not hesitate to get in touch with William Welch or your usual contact in the Private Client Team today.