Non-dom changes from 6 April 2025: What do they mean for trusts?
On 30 October 2024, the government released its much awaited draft legislation on the proposed changes for non-UK domiciled taxpayers (non-doms), which are to come into effect from 6 April 2025. In addition to directly impacting the UK tax status of many existing non-doms, the changes are expected to have a significant effect on some UK domiciled taxpayers (UK doms) and on many trusts.
While this insight considers the effect on trusts specifically, you can find more details on the impact of the changes on non-doms and UK doms here.
Income tax and capital gains tax (CGT)
Prior to 6 April 2025, foreign income and gains in a trust of which a non-domiciled and deemed domiciled settlor is a beneficiary are protected until distributed in most cases. The position is similar for non-settlor beneficiaries.
From 6 April 2025 onwards, the trust foreign income and gains will be taxable on a UK resident settlor who is also a beneficiary on an arising basis unless they are in the first four years of UK tax residence, in which case a claim can be made for foreign trust income and/or gains to be excluded from UK tax. Where a claim is made for the exemption to apply to income and gains that are matched to capital payments, these payments are not treated as reducing the pools of trust income and gains that are available for matching in the future.
For non-settlor interested trusts, very similar rules apply to UK resident beneficiaries who receive taxable trust benefits or payments. Where the conditions are met, the new regime can apply to discretionary income distributions, income attributable to the taxpayer as a life tenant and/or to income or gains that are matched to capital distributions or benefits from the trust.
The above sets out the basic rules but there are also wide-ranging anti-avoidance provisions aimed at preventing individuals who are UK resident from avoiding a tax liability by transferring assets to a person abroad, including the Transfer of Assets Abroad (ToAA) legislation.
The government has announced that they will be making some modifications/clarifications around how the ToAA will operate in conjunction with the new rules operative from 6 April 2025. You should contact a member of our specialist team or your usual Azets advisor in the first instance if you have any questions around ToAA.
The ‘temporary repatriation facility’ (TRF) can be applied to unremitted and previously untaxed foreign income and gains that are received or have been otherwise attributed to a taxpayer from an offshore trust prior to 6 April 2025 or in the three years from 2025/26 to 2027/28 inclusive. This regime for post-5 April 2025 distributions only applies only applies to capital distributions and not to income distributions. The taxpayer can designate such a payment or benefit and pay tax on it at lower rates of 12% in 2025/26 and 2026/27 or 15% in 2027/28. No further tax will then be payable on bringing the foreign income or gains to the UK in the same or a future tax year.
Please refer to our related insight for more detail on claims to exempt foreign income and gains in the first four years of UK residence and on the TRF.
Inheritance tax (IHT)
To date, a trust’s IHT status has normally been based on the settlor’s domicile and the location of assets in the trust. With very limited exceptions, all UK assets, as well as loans and foreign company shares to the extent that their value is derived from UK residential property, are subject to UK IHT regardless of the settlor’s domicile status. Foreign assets are within the scope of UK IHT only if the settlor is UK domiciled (where the settlor is non-dom, these assets are not within the scope of UK IHT and are known as ‘excluded property’).
With effect from 6 April 2025, a trust’s IHT status will instead depend on the long-term residence status of the settlor. The settlor will broadly be long-term UK resident if he or she was UK tax resident (under the UK’s statutory residence test and/or its predecessor rules) in at least 10 of the last 20 tax years.
Where the settlor has left the UK and become non-UK resident, there is a ‘tail’ to determine how long he or she remains long-term UK resident for after leaving. The period ranges between three and ten years depending on how many tax years the individual was resident for in the last 20 tax years.
The following table summarises the impact of the settlor’s long-term residence status on a relevant property trust’s IHT status from 6 April 2025 onwards (this applies to all discretionary trusts and many interest in possession trusts):
Settlor’s status | Not long-term UK resident | Long-term UK resident | Deceased pre-6 April 2025 | Deceased post-5 April 2025 |
UK assets | Subject to UK IHT | Subject to UK IHT | Subject to UK IHT | Subject to UK IHT |
Foreign assets | Not subject to UK IHT (for qualifying interest in possession (QIIP) trusts, the beneficiary also has to not be long-term UK resident for this to apply). | Subject to UK IHT | Subject to UK IHT if the settlor was UK domiciled at the date the assets became comprised in the settlement, otherwise not subject to IHT. | Subject to UK IHT if the settlor was long-term UK resident immediately prior to death, otherwise not subject to UK IHT. |
A QIIP trust broadly means one in which the individual has been entitled to an interest in possession since before 22 March 2006 or to which they became entitled immediately following the death of the settlor (there are also limited other circumstances in which a QIIP may arise).
Where a trust has assets that are within the scope of UK IHT, these will be subject to 10-yearly charges and to exit charges on assets leaving the trust at a maximum rate of 6% (for trusts in the relevant property regime). Going forward, a trust’s IHT status in respect of its foreign assets may change depending on where the settlor is resident, so is no longer fixed based on the position at the settlement date (as it is currently).
The following transitional provisions also need to be considered:
- If the settlor was UK domiciled at the point of settlement and is not a long-term UK resident, there will be an exit charge at a maximum rate of 6% on foreign assets leaving the UK IHT regime on 6 April 2025.
- Non-domiciled individuals (including those who are deemed domiciled) as at 30 October 2024 who are non-UK resident in 2025/26 will be treated as long-term UK resident for years in which they satisfy the current deemed domicile test, so having been UK resident in at least 15 of the previous 20 tax years and in their first four years since leaving the UK. The new rules will apply with effect from the year that they resume UK residence.
- Excluded property within a trust that was not within the scope of UK IHT immediately before 30 October 2024 will not be subject to UK IHT in the settlor’s estate, even if the settlor is a beneficiary of the trust and is a long-term UK resident. It could however still be within the relevant property regime referred to above.
- Excluded property within a QIIP trust that was not within the scope of UK IHT immediately before 30 October 2024 will not be subject to UK IHT when the QIIP ends or on the death of the QIIP beneficiary. QIIPs are not subject to the relevant property regime.
The government has confirmed that no changes are expected to the UK’s network of double taxation treaties and how these operate.
Planning considerations
The change in relation to trusts are expected to be very wide-ranging and all individuals and trustees who may be affected (including trustees of trusts which currently have no connection with the UK) should undertake a review of the status of any trusts with which they are associated.
In particular, the following points need to be considered:
- The trustees need to be aware of the residence status of the settlor at all times, since this could directly affect the IHT status and potentially residence status of the trust.
- The IHT status of the trust will need review each time there is a 10-year anniversary and/or exit from the trust as there may be UK tax reporting and payment obligations.
- For trusts with UK domiciled settlors who are not long-term UK residents, there will be an exit charge on foreign assets held as at 6 April 2025.
- There will be exit charges on foreign assets at any point when a settlor ceases to be long-term UK resident.
- Thought will need to be given to whether to distribute income or capital to UK resident beneficiaries, in terms of what benefits from the new regime for new-arrivers are available, what amounts might benefit from the temporary remittance facility and how the matching rules operate going forward.
- The trustees may need to know whether or not the settlor and beneficiaries are claiming relief under the new regime in order to correctly calculate their pools of income and gains.
We are here to help
If you have any questions on the anticipated changes, how they may impact your position and how to plan for them, please get in touch with your usual Azets advisor or a member of our tax service team.
Please note that these comments are based on draft legislation and a technical note from the government, and the position may change prior to the draft provisions passing into law. Specific advice relevant to your own and/or your trust’s circumstances should be taken before relying on or acting on anything contained in this insight.