Impact to Trusts
Currently, trusts that qualify as excluded property trusts (EPT), generally those established by non-UK domiciled individuals and holding non-UK assets, are not subject to IHT on their non-UK assets (except when these include indirect interests in UK residential property).
Where an LTR settlor leaves the UK and ceases to be an LTR, the non-UK assets of the trust will become excluded property. At that point there will be an IHT exit charge and “tail” for IHT purposes. This “tail” period ranges from 3 to 10 tax years, depending on the length of time the individual was UK resident. Tax advice would need to be sought to clarify the exact position.
How will the new rules affect settlors?
- Settlor deceased pre 6 April 2025: The IHT status of the trust will not change, and you look at the settlor’s domicile at the time the trust was established.
- Settlor deceased post 5 April 2025: Excluded property status will not be available if they were LTR in the UK at the time of death.
- Settlor is UK LTR: All assets subject to IHT.
- Settlor is not UK LTR: The Trust will remain as an EPT.
- Settlor is UK LTR, then leaves the UK: After the ‘tail’ period there will be an exit charge of up to 6% and the trust status changes from a relevant property to an excluded property trust.
Trustee Considerations
By proactively managing these considerations, trustees can mitigate tax liabilities, ensure compliance with evolving UK laws, and safeguard the trust’s long-term effectiveness for both the settlor and beneficiaries:
- Ascertain the settlors tax residency status to note if they will be classed as an LTR. How long have they been in the UK?
- Monitor the settlor’s residency as this will affect the IHT status of the trust.
- Does the settlor have any plans to leave the UK? Do they do this sooner than originally anticipated to mitigate IHT on UK situs assets?
- Trustees will need to be aware of when the Trust was created to consider when the next 10-year anniversary will arise.
- Keep track of the IHT implications for the trust especially if the settlor leaves the UK, which will trigger an exit charge.
Example
A Jersey domiciled settlor who moved to the UK for family reasons in 2020, will therefore become an LTR in 2030. The trust currently has no UK situs assets.
As trustee, we will:
- Note when the trusts next 10-year anniversary is – is it before or after 2030?
- Make the settlor aware that these new rules mean their residence can impact the status of the trust – previously in this scenario all the trust assets were outside the scope of IHT forever (assuming no tainting), that is no longer the case.
- Encourage the settlor to seek UK tax advice on their personal tax position as their estate will be subject to IHT once they become LTR.
As a reminder Alex Picot Trust does not offer advisory services on matters of UK taxation.
