Taxation of offshore trusts

From 6 April 2025, a new Foreign Income and Gains (FIG) regime for internationally mobile individuals has replaced the remittance basis previously available to non-UK domiciled individuals (non-doms), with changes also made to the taxation of their offshore structures.

Please see our other articles for more information on the changes made to the income tax and capital gains tax regime for non-doms, and inheritance tax regime for non-doms.

The rules prior to 6 April 2025

Income and gains

Prior to 6 April 2025, UK resident settlors of non-UK resident trusts which were ‘settlor-interested’ could be personally assessed on income arising within the trust structure under two sets of provisions: the settlements code and the Transfer of Assets Abroad (TOAA) code. The settlements code applied specifically to income arising at trust level; however, the TOAA code applied more broadly and could bring into scope income arising to underlying non-UK companies of a trust.

Similar provisions applied for capital gains tax (CGT) purposes, which could attribute chargeable gains arising to a settlor-interested trust or underlying company to a UK resident settlor.

Settlors who were non-UK domiciled or deemed domiciled (by virtue of having been UK tax resident for 15 of the previous 20 tax years) could benefit from protections from UK taxation. Provided no property or value had been added to the trust following the settlor becoming deemed domiciled, the settlor should not have been liable to pay UK tax on the foreign income and gains arising within the trust structure as it arose. Foreign income and gains arising within the trust were instead pooled and only taxed if matched to capital payments received by UK resident beneficiaries.

The fact that foreign income and gains arising to protected trusts could, broadly, accumulate tax-free under the regime meant that non-UK resident trusts were a popular structure for many non-UK domiciled and deemed domiciled individuals since 2017.

The TOAA code and similar CGT provisions also applied to non-UK resident trusts which were not considered to be ‘settlor-interested’. Foreign income and gains arising within these trust structures could, broadly, accumulate tax free and were only brought within the scope of UK tax if matched to a capital payment received by a UK resident beneficiary.

Before 6 April 2025, if a beneficiary was UK resident but non-UK domiciled, they had the opportunity to claim the remittance basis of taxation, meaning they were required to pay UK tax on any capital payments received from a non-UK resident trust if the capital payment was received in or remitted to the UK.

Inheritance tax

Prior to 6 April 2025, non-UK property comprised within a settlement was regarded as excluded property for inheritance tax (IHT) purposes (with the exception of an indirect holding in UK residential property), if it had been settled at a time when the settlor was neither UK domiciled nor deemed to be UK domiciled.

Excluded property held by a trust was outside the scope of IHT, and this status could, in certain circumstances, not be lost even if the settlor later became UK domiciled or deemed to be UK domiciled.

The new rules from 6 April 2025

Income and gains

The FIG regime

With effect from 6 April 2025, the remittance basis of taxation has been replaced with a new regime which applies to individuals who become UK tax resident after a period of at least 10 consecutive tax years of non-UK tax residence. Under the new FIG regime qualifying new residents do not (subject to making an appropriate claim) pay UK tax on their foreign income and gains for their first four tax years of UK residence. The foreign income and gains remain outside the scope of UK taxation regardless of whether or not these funds are remitted to the UK. The Government refers to this new system as the FIG (foreign income and gains) regime. Please refer to our article on the changes made to the income tax and capital gains tax regime for non-doms for more detail.

Taxation of offshore structures

The rules for taxing beneficiaries of non-UK tax resident trusts remain largely unchanged. Capital payments made to UK tax resident beneficiaries who are not eligible for the FIG regime continue to match to income and gains within non-UK tax resident structures and are taxed in full when the capital payments match.

Beneficiaries who claim relief under the FIG regime are able to receive income distributions and capital payments from non-UK resident trust structures without triggering a UK tax charge (regardless of whether or not the payment or benefit is received in the UK). It is, however, imperative that appropriate claims and disclosures of the capital payments are made in the beneficiaries’ tax returns for the claims to be valid. Capital payments made to beneficiaries who claim relief under the FIG regime will not match to trust income and gains; it is not therefore possible to ‘wash-out’ trust income and gains using such capital payments.

If a qualifying FIG taxpayer fails to disclose a capital payment, it will be treated as matching to relevant income and capital gains of the non-UK tax resident trust structure and will be taxable as such.

Capital payments received by a UK tax resident beneficiary by 5 April 2025, during a period when the taxpayer claimed the remittance basis, continue to be taxable when remitted to the UK, provided the capital payment was matched to foreign income and gains arising to the non-UK tax resident trust (as was the case under the previous rules). If a beneficiary has an unmatched capital payment brought forward on 6 April 2025, this will become taxable when it matches to future relevant income or gains of the trust structure.

From 6 April 2025, the trust protections for settlor-interest trusts introduced in 2017 have been removed. As was the case before, the gross UK source income received by a non-UK tax resident trust structure continues to be assessable on the settlor as it arises. However, the crucial change is that foreign income and gains arising to a non-UK tax resident trust structure where the settlor is UK tax resident, and is regarded as having an interest, are now taxable for settlor unless they are eligible for the FIG regime.

In respect of income, the settlor will be taxable on the gross income before the deduction of expenses unless they would be deductible were they incurred by the settlor personally. For example, qualifying rental property expenses would be deductible, but the fees of non-UK resident trustees or directors, and investment management fees, will generally not be deductible.

If a settlor is eligible to claim the FIG regime, they will not be taxed on foreign income and gains arising in the settlement within the four-year FIG regime period provided an appropriate claim is made on the settlor’s tax return.

Foreign income and gains which arose to a non-UK tax resident trust structure before 6 April 2025, remain pooled and are available to match against capital payments made to UK tax resident settlors and beneficiaries alike, unless previously matched.

Foreign income which arises to a non-UK tax resident trust structure in a tax year when the settlor makes a valid claim for the FIG regime continue to be relevant income which may be available to match to capital payments to UK tax resident beneficiaries (other than the settlor) as referred to above.

Capital gains arising to a non-UK tax resident trust structure in a tax year when the settlor makes a valid claim for the FIG regime will be pooled and be available to match to future capital payments received by a UK tax resident beneficiary, in a tax year when the recipient does not claim relief under the new FIG regime.

A new statutory right of recovery allows settlors to reclaim the tax they pay in respect of income arising to a non-UK tax resident trust structure under the TOAA code. This aligns the position with the settlements code and capital gains code which have statutory rights of recovery. The recovery is not regarded as a capital payment and is not taxable. However, a failure to reclaim the tax from the non-UK tax resident structure may be seen as an addition to the settlement for IHT purposes thus potentially giving rise to a chargeable event depending on the settlor’s status.

A consultation on the anti-avoidance provisions applying to offshore structures was held between October 2024 and February 2025. It is therefore expected that there may be further changes on the way.

Temporary Repatriation Facility (TRF)

A specific Temporary Repatriation Facility (TRF) has been introduced, which allows settlors/beneficiaries to remit capital payments which have matched to foreign income and gains at a reduced rate from 6 April 2025. This relief is available for a period of three years.

To use the TRF, taxpayers are required to designate FIG to which the relief will apply within their self-assessment tax return. Designations made during the 2025-26 and 2026-27 tax years will be taxed at a flat rate of 12%, with the rate rising to 15% for designations made during the 2027-28 tax year.

The TRF can be claimed on stockpiled foreign income and gains within offshore structures in the following circumstances:

• Where income and gains are matched to capital payments made to non-dom beneficiaries before 6 April 2025 to which the remittance basis applied, and
• Where capital payments are received from offshore structures in the 2025-26, 2026-27 and 2027-28 tax years, provided these capital payments match with foreign income and gains of the offshore structure which arose prior to 6 April 2025. To qualify for this relief, the beneficiary receiving the capital payment must have claimed the remittance basis in a tax year prior to 6 April 2025.

This will provide many beneficiaries of non-UK trusts, who don’t qualify for the FIG regime from 6 April 2025, with a limited window of opportunity to receive capital payments from their offshore structures at a significantly reduced rate of tax. Beneficiaries should therefore consider whether it is appropriate to make a claim for the remittance basis in one or more of the tax years to 2024-25, where possible, to take advantage of the TRF for pooled income and stockpiled gains.

It is worth noting, however, that the TRF is not available for income distributions received from offshore settlements.

The implications of these changes in the legislation are significant and individuals with interests in non-UK tax resident structures should take advice as soon as possible as it is imperative to consider each case specifically.

Onward gifting rules and close family member rules

Pre-existing anti-avoidance provisions commonly referred to as the ‘onward gifting provisions’ have been modified to align with the introduction of the new FIG regime.

Broadly, if an individual receives a capital payment from an offshore trust during a period when they are eligible to claim the FIG regime and, within three years, makes an onward gift to another individual who is UK tax resident, the onward recipient may be taxable on the capital payment, unless they are also able to claim the FIG regime.

If a beneficiary who is a ‘close family member’ of the settlor (including their spouse and minor children) receives a capital payment during a period when they are eligible to claim the FIG regime, this could result in the capital payment being assessed onto the settlor unless they also make a valid claim under the FIG regime.

Increase in capital gains tax rate

Following the increase in the CGT rate from 30 October 2024, any capital payments received before 30 October 2024 which match to stockpiled capital gains, will be subject to tax based on the CGT rates in force before 30 October 2024.

If a capital payment is made on or after 30 October 2024 which matches to stockpiled capital gains, the capital payment will be subject to CGT at the rates applying from that date. Please note that these payments may still be subject to the remittance basis, and if the capital payment has matched to stockpiled gains which were realised more than two years before matching, a supplementary charge will be applied.

Inheritance tax

Excluded property status

A new residence-based test for IHT applies from 6 April 2025. This test means that an individual is within the scope of IHT on their worldwide assets if they have 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 occurs (they are ‘long-term resident’). Moreover, an individual will remain a long-term resident until they have been non-UK tax resident for a specified period of time (between three and 10 full tax years, see our article on inheritance tax for more details).

Moreover, from 6 April 2025, the IHT status of non-UK situs property comprised within a settlement will not be fixed (and therefore not solely determined) by reference to the tax status of the settlor at the time that the property is settled. The domicile status of the settlor is no longer of any relevance going forward.

Instead, the chargeability of non-UK situs property comprised within a settlement which has a living settlor, and therefore its excluded property status, depends on whether the settlor is a long-term resident on the date of the IHT chargeable event. These events are:

• When assets are settled into trust,
• The 10-year anniversary of the commencement of the trust,
• When assets are distributed from the trust (‘exit charge’), and
• The death of the settlor (if the gift with reservation of benefit (GWROB) rules apply – see below).

Therefore, when the settlor is a long-term resident, any property they have settled will be within the charge to IHT, even if they were not a long-term resident when the assets were originally settled.

This means that non-UK situs property held within a settlement has the potential to fall in and out of the scope of charge to IHT, depending on the settlor’s movements. Therefore, excluded property trusts previously outside the scope of IHT may fall within the scope of IHT from 6 April 2025, and relevant property trusts previously within the scope of IHT may fall outside the scope of IHT from 6 April 2025.

Where the assets of a trust cease to be within the scope of IHT because the settlor ceases to be a long-term resident, this will give rise to a deemed exit charge (see further information below).

From 6 April 2025, the future ongoing status of non-UK situs property held within a settlement with a deceased settlor are now, in effect, permanently fixed based on the residence status of the settlor (and in some circumstances also the beneficiary) on the date of the settlor’s death. Broadly:

• If the settlor dies on or after 6 April 2025, the non-UK situs property will continue to be within the charge to IHT for the remaining life of the trust, and therefore not regarded as excluded property, if the settlor was a long-term resident immediately prior to their date of death, or
• If the settlor dies before 6 April 2025, the non-UK situs property of the settlement will be outside the charge to IHT for the remaining life of the trust, if the settlor was non-UK domiciled at the time it became comprised within the settlement, as under the previous rules. This includes income which has derived from the non-UK situs property of the settlement but is accumulated to capital on or after 6 April 2025.

There is also an additional requirement imposed on settlements in which a beneficiary has a qualifying interest in possession (QIIP) for IHT purposes. From 6 April 2025, in order for non-UK situs property comprised within such settlements to be regarded as excluded property, neither the settlor nor the beneficiary with the QIIP can be long-term resident on the date of the IHT chargeable event.

There are various other rules to determine the IHT status of assets held within interest in possession trusts, making this area a particularly complicated one. Therefore, any trustees or life tenants of such trusts should take advice on this as a matter of urgency.

All UK situs property, and all non-UK situs property whose value is indirectly derived from UK residential property, continue to remain fully within the charge to IHT from 6 April 2025, regardless of whether the settlor or a beneficiary of the trust is a long-term resident, as was previously the case.

Relevant property regime

From 6 April 2025, non-UK situs trust held property is subject to relevant property charges under the ‘relevant property regime’, if the settlor is a long-term resident at the date of the relevant charge. The two key tax charges under the relevant property regime are:

• 10-year charges: IHT charges on each ten-year anniversary of the settlement of the trust or up to 6% of the value of the trust assets held on that date, and
• Exit charges: IHT charges on the appointment of trust assets from a trust, or up to 6% of the value of the trust assets appointed but pro-rated for the number of complete quarters since the last 10-year anniversary.

There is no ‘grandfathering’ of excluded property status for non-UK situs property held within trust and regarded as excluded property immediately prior to 30 October 2024.

Conversely, this will be particularly advantageous for certain settlements (for example, those with a UK domiciled settlor who is not regarded as a long-term resident from 6 April 2025), which will fall out of the ‘relevant property regime’.

However, settlors need to be mindful of the ability for their settlements to transition in and out of the regime. From 6 April 2025, an exit charge will arise on non-UK situs settled property whenever relevant property becomes excluded property, as a result of the settlor leaving the UK and ceasing to be regarded as long-term resident. It should be noted that individuals who left the UK prior to 6 April 2025 may still meet the definition of long-term resident and therefore trusts they have settled may be subject to such an exit charge.

Where non-UK situs settled property which was previously regarded as excluded property becomes relevant property, exit charges and 10-year anniversary charges will arise on any trust distributions or on subsequent 10-year anniversaries (but the calculation will take into account a discount for the number of completed quarters that have elapsed since the last 10-year anniversary and during which the property was excluded property).

Following the settlor’s death, ongoing charges under the ‘relevant property regime’ will only apply if the settlor was a long-term resident at the date of their death.

Gift with reservation of benefit (GWROB) regime

Where a settlor of a trust can also benefit from said trust, the property comprised in the settlement is taxed as though it remained in the settlor’s estate under the GWROB provisions.

Previously, if the settlor was neither domiciled, nor deemed to be domiciled in the UK when the trust was settled, the non-UK situs assets of the trust would be excluded property and therefore the GWROB provisions would not result in an IHT charge for the settlor.

From 6 April 2025, if the settlor is a long-term resident, the non-UK situs assets are treated as forming part of the settlor’s chargeable death estate, even if they are not a long-term resident when they settled the trust.

If a reservation in the trust ceases during the settlor’s lifetime (eg they are irrevocably excluded from benefitting from the trust), this can be treated as a potentially exempt transfer and may therefore be subject to IHT if the settlor does not survive a further seven years from when the reservation ceased. Whether a potentially exempt transfer takes place will depend on whether the settlor is a long-term resident at the date the reservation ceases.

However, there is a limited measure of ‘grandfathering’ provided for non-dom settlors of existing excluded property settlements, where the excluded property was comprised in the settlement prior to 30 October 2024. The non-UK situs property of such settlements will continue to be excluded property for the purposes of the GWROB provisions, and therefore will not be chargeable to IHT on the death of the settlor, even where the settlor continues to reserve a benefit in the trust assets after 5 April 2025.

Where such grandfathered settlements exist, advice should be taken to ensure that they maintain this status. Moreover, such settlements could still be within the scope of the relevant property regime from 6 April 2025 (see above) and additions into settlements made on or after 30 October 2024 will not benefit from these transitional rules.

How we can help

These reforms significantly impact many internationally mobile individuals and their wider structures. We urge any individuals affected to review their affairs and start conversations with their advisors sooner rather than later.

We provide advice and support to individuals with international tax complexities. We’re also part of Nexia, a global network of independent accounting and consulting firms that operate internationally in over 122 countries. This means we can provide you with multi-jurisdictional support to find the right solution.

If you’d like to understand more about this topic and the options available to you, please get in touch.

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