Autumn Budget 2024: what trustees need to know
Insight
The Autumn Budget 2024 confirmed that from 6 April 2025, major changes will be introduced to the UK taxation of offshore trusts and their UK tax resident settlors. We have set out below a summary of the key announcements, as well as some initial practical steps trustees should take now to prepare for the new regime.
Trusts and inheritance tax (IHT): key changes ahead
From 6 April 2025, assets held by offshore trustees will be brought within the scope of UK IHT if the settlor is a “long-term UK resident”, ie the settlor has been a UK tax resident for 10 out of the previous 20 tax years.
This means that non-UK assets held by the trustees of an offshore trust will be within the scope of IHT at times when the settlor is a long-term UK resident (including after the settlor leaves the UK but meets the criteria for being treated as a long-term UK resident for up to 10 years after leaving), regardless of the settlor’s domicile status when the trust was established or when assets were added to the trust.
The new regime will therefore bring a number of existing “excluded property” trusts within the scope of UK IHT for the first time.
There are two different IHT regimes which may apply to trusts within the scope of UK IHT:
- the UK’s relevant property regime, which imposes IHT charges on every ten-year anniversary of the trust’s creation and when property leaves the trust; and
- the "gifts with reservation of benefit" (GROB) rules.
Broadly, all trusts, including longstanding trusts created before 30 October 2024 and trusts holding no UK assets, will be within the relevant property regime for as long as the settlor meets the criteria for being a long-term UK resident. This applies regardless of whether the settlor can benefit from the trust.
Trusts in the relevant property regime will need to report on and pay IHT (at a maximum rate of 6% every 10 years) on each 10 year anniversary and on any distribution of capital (not income).
Once in the relevant property regime, the trust will pay a further pro rata “exit” charge when it ceases to be in the relevant property regime (this will happen when the settlor ceases to be a long-term UK resident, which may be many years after they leave the UK).
The GROB rules already apply to all UK situs assets held in a trust (which would usually include, for instance, trust loans made to a UK resident debtor) and to value associated with UK residential property (eg shares in a non-UK company owning UK residential property or to relevant loans used to fund or maintain UK residential property).
From 6 April 2025, the GROB rules will apply to all trusts, holding assets anywhere in the world, created or funded on or after 30 October 2024 where the settlor is or becomes a long-term UK resident if the settlor can benefit from the trust. Where a settlor is a long-term UK resident and they are not excluded from benefiting from the trust, worldwide trust assets will be treated as being owned by the settlor on their death for IHT purposes on the basis that the settlor has retained a benefit in the trust assets (note that the GROB rules do not apply to excluded property). The GROB provisions will not apply to assets placed in trust by non-UK domiciled individuals before 30 October 2024, except in relation to UK assets.
Trusts and IHT: practical points for trustees
Where trusts are likely to enter the UK IHT regime for the first time, trustees should take the following steps now to prepare for the changes in April 2025:
- For trustees holding non-UK assets, liability to IHT relevant property regime charges will be tied to the settlor’s status as a long-term UK resident. It is no longer the case that non-UK assets settled when the settlor was non-UK domiciled are outside of the scope of UK IHT. Trustees should take advice now to confirm the settlor’s UK tax residency status (or encouraging the settlor to take their own advice on this).
- Trustees must also keep very close track of whether the settlor is UK tax resident year on year. This is especially important given the new IHT “tail” provisions that can keep a settlor within the UK’s IHT net for up to 10 years after they have left the UK. During this “tail” period, the relevant property regime charges continue to apply to the trustees. As explained, where a settlor loses their status as a long-term UK resident, this change in status will give rise to an IHT exit charge for the trustees. Certainty of the settlor’s status year on year should become part of trustees’ annual checklist.
- As the trustees are responsible for reporting and paying relevant property regime IHT charges to HMRC, trustees must be confident on the dates (in particular 10-year anniversaries) and events (eg capital distributions) on which IHT will be payable. Failure to report and pay IHT by the relevant deadline will incur interest and penalties.
- For many trusts, determining the ten-year anniversary date can be complex. The UK IHT legislation means that on a trust to trust transfer, the original transferor trust’s creation date will continue to be the 10-year anniversary date after the transfer to a new trust, and on subsequent transfers. New 10-year anniversary dates will also be created on additions to the trust. This means that it is very common for a trust to have a 10-year anniversary date that is not the anniversary of that trust’s creation, and there may be multiple 10-year charge dates within one trust.
- IHT on 10-year anniversaries is due six months after end of the month in which the 10-year anniversary falls. Determining the ten-year anniversary of the trust as early as possible will ensure the trustees can plan for paying the ten-year anniversary charge. Planning in advance is particularly important if assets in the trust are illiquid. Trustees will need to consider funding early, and may wish to explore borrowing, sales etc.
- Depending on the asset profile of the trust, trustees now falling within the relevant property regime should consider taking advice on whether any assets qualify for IHT reliefs, such as business property relief, in order to mitigate tax costs to the trust. Reforms to business property relief were also announced at the Autumn Budget, to take effect from April 2026, meaning fresh advice should be obtained to confirm the availability and extent of the relief in light of the incoming changes.
- Although the GROB rules will not apply to non-UK assets placed in trust by non-domiciled settlors before 30 October 2024, the GROB rules will apply to any assets added to existing trusts on or after 30 October 2024, or to new settlements created by the settlor on or after this date. Trustees should take extra care to ensure that, where the settlor (and spouse) is not a beneficiary, the settlor does not in fact benefit in any way from the settled assets. This attention to benefit may not have been necessary from a tax perspective previously. Detailed facts, such as who is using trust property such as holiday homes, should be checked.
The changes announced at the Autumn Budget may have left some settlors questioning whether creating a trust is still an attractive option, especially those settlors who will shortly become long-term resident in the UK (whether in April 2025 or later). Generally speaking, trust structures can still offer settlors a number of advantages, in particular, the opportunity to move assets out of their estates into long-term, flexible wealth protection structures for future generations without incurring an IHT entry charge (while a settlor is not a long-term UK resident). Although 10-yearly charges and exit charges will apply once the settlor becomes a long-term UK resident, it might be that an effective annual tax of 0.6% (ie a 6% 10-year anniversary charge spread over 10 years) could be regarded as relatively good value to move assets into a protective structure and out of the settlor’s estate, if the settlor is prepared to be excluded from benefiting from that trust (to avoid the GROB rules applying). Establishing a trust where the settlor and their spouse/civil partner are excluded can also be beneficial for the settlor’s UK income tax position (see below).
Trusts: UK income tax and UK capital gains tax
Trustees of non-UK tax resident trusts generally have little or no exposure to UK income tax and UK capital gains tax in respect of their foreign income and gains. However, where the trust is “settlor-interested”, certain UK anti-avoidance rules can attribute foreign income and gains of the trust to the settlor and/or beneficiaries, resulting in UK income tax and/or UK capital gains tax charges for such individuals.
Rules were introduced in April 2017 to ensure that foreign income and gains of “protected settlements” (ie trusts created and funded before a settlor became deemed domiciled (or domiciled) in the UK) would not be taxed on settlors of settlor-interested trusts as they arise, unless that protected settlement status is lost. This offered significant protection for settlors of settlor-interested trusts in respect of foreign income and gains arising in the trust.
However, from 6 April 2025, these protections from foreign income and gains arising within settlor-interested trusts will only be available for settlors who are eligible for the new four-year “FIG regime”, which is being introduced to replace the UK’s remittance basis regime. Broadly, the new FIG regime will only be available to individuals who are in their first four years of UK residence and who have not been UK tax resident in the 10 UK tax years prior to their arrival in the UK. For settlors not qualifying for this new regime, from 6 April 2025, any foreign income and gains arising within offshore trusts (new and existing) will be taxed on the settlor on an arising basis.
For UK income tax purposes, a trust will be “settlor-interested” if the settlor or their spouse/civil partner are able to benefit under the trust (or if minor children ie those under 18, actually benefit under the trust). Trustees with settlors impacted by these changes should therefore discuss the possibility of excluding the settlor and their spouse/civil partner as beneficiaries of the trust, as this would prevent foreign trust income being assessed on the settlor on an arising basis.
However, for capital gains tax purposes, the definition of a “settlor-interested” trust is much wider; it includes not only the settlor and their spouse/civil partner, but also any of their children (including adult children) and grandchildren. Accordingly, excluding the settlor and their spouse/civil partner as beneficiaries of the trust will not prevent the attribution of foreign gains to the settlor where a wider class of family members can still benefit from the trust.
Once a settlor becomes non-UK tax resident, although income and gains will no longer be attributed to the settlor, any foreign income and gains received by the trustees will form part of the trustees’ income and gains pools. The settlor’s tax residency position should be continually monitored by the trustees to ensure that the settlor (if not excluded from the trust) does not inadvertently fall back within the income and gains attribution rules by becoming UK tax resident in later years.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, December 2024