presentation US Families | March 13, 2025

6 Key Considerations for Excluded Property Trusts Before 6 April 2025

Written by Andrea Solana, CFP™

As an American living in the UK, managing financial affairs is never straightforward. From purchasing property to investing in funds, seemingly simple decisions can trigger unexpected tax complexities. As tax laws evolve, staying informed about upcoming changes is crucial to effective wealth management. With the abolition of the existing non-dom tax regime and the introduction of a residence-based tax system from 6 April 2025, significant changes will impact excluded property trusts. Here are six key considerations to bear in mind ahead of these upcoming changes.

  1. Excluded Property Trusts Will Face New Tax Liabilities

Historically, non-domiciled individuals have been able to establish excluded property trusts before becoming UK deemed domiciled. This strategy protected non-UK situs assets from UK inheritance tax (IHT) and, in many cases, shielded trust income and gains from UK taxation. However, from 6 April 2025, settlor-interested trusts will be subject to new tax rules, making them less effective for estate planning.

  1. Settlor-Interested Trusts Will Be Taxed on Worldwide Assets

Under the new residence-based tax regime, settlors who have been UK residents for more than four tax years will be taxed on worldwide assets held within settlor-interested trusts. If the settlor, their spouse, or minor children benefit from the trust, income and gains will be taxed on the settlor while they remain UK resident. If only adult children or grandchildren benefit, capital gains tax (CGT) will apply on an arising basis.

  1. Temporary Repatriation Facility (TRF) Can Help Manage Tax Costs

For those who previously paid UK tax on the remittance basis, the Temporary Repatriation Facility (TRF) provides a limited opportunity to withdraw foreign income and gains at a reduced tax rate (12% in 2025/26 and 2026/27, and 15% in 2027/28). This could be an important strategy for individuals seeking to access offshore capital in a tax-efficient way before the new rules take full effect.

  1. Long-Term Residents Will Be Subject to Global IHT Exposure

Once an individual has been UK resident for 10 out of the last 20 years, they will be considered a long-term resident for IHT purposes, meaning their worldwide assets, including those held in excluded property trusts, will be within the scope of UK IHT. Furthermore, even after leaving the UK, IHT exposure may persist for up to 10 years.

  1. Relevant Property Regime Introduces Additional IHT Charges

Settlor-interested trusts created by long-term residents will now fall under the relevant property regime, making them subject to a 6% ten-year anniversary charge on worldwide assets. If the settlor later ceases to be a long-term resident, an exit charge of a pro-rated 6% will apply. However, trusts settled before 30 October 2024 will be protected from personal IHT exposure if a reservation of benefit exists, limiting taxation to the ten-year charge.

  1. The US-UK Estate Tax Treaty May Offer Some Protection

For Americans who settled trusts while solely US domiciled, not yet UK deemed domiciled, and not UK nationals at the time of settlement, the US-UK estate tax treaty may continue to protect worldwide trust assets from both personal IHT and ten-year anniversary charges. This may also provide opportunities for new settlements by US nationals who meet these criteria before becoming long-term UK residents.

Final Thoughts

The shift to a residence-based tax regime brings significant implications for excluded property trusts and broader estate planning strategies. While these changes limit the advantages of such trusts, opportunities remain for those who act proactively. Individuals with existing trusts should seek advice from tax professionals, legal experts, and wealth managers to assess their position and determine any necessary actions before April 2025 to optimise their financial structure.

The Legal Stuff

  • The information contained herein is subject to copyright with all rights reserved.  The document may not be copied, forwarded or otherwise distributed, in whole or in part, to any other party without our written consent.
  • Any impact from the actual or speculative tax changes contained in this document will depend on the individual circumstances of each client and may be subject to change in the future.
  • Nothing in this document constitutes investment, tax or any other type of advice and should not be construed as such.
  • MASECO is not a tax specialist and we recommend that anyone considering investing seeks their own tax advice.
  • The views expressed in this article do not necessarily reflect the views of MASECO as a whole or any part thereof.
  • This document is provided for information purposes only and is not intended to be relied upon as a forecast, research or investment advice.
  • This document does not constitute a recommendation, offer or solicitation to buy or sell any products or to adopt an investment strategy.

 

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