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Much of the below is based on draft legislation and may change.
A major change has happened to the UK taxation of trusts set up by formerly non-UK domiciled settlors. Previously, an individual that was non-domiciled and was going to become domiciled/deemed-domiciled for the purposes of UK IHT was able to settle a trust whilst they were still non-domiciled and have the foreign assets of this trust be excluded from UK IHT. These trusts were termed Excluded Property Trusts and previously would only lose their IHT protection on foreign assets if the settlor became deemed domiciled and was born in the UK. From 6 April 2025, the IHT protections for foreign assets have been stripped away if the settlor becomes UK domiciled for any reason or has been UK resident for 10 of the last 20 tax years. The historical domicile basis for UK IHT is being replaced by a system where individuals are liable to IHT if they have been UK resident under the Statutory Residence Test for 10 of the last 20 tax years.
IHT may be payable at a rate up to 6% in the form of exit charges on capital distributions from a trust. This depends on many factors, including whether the settlor has made gifts or set up other trusts in the 7 years before settling the trust.
Trusts that were not liable to IHT by virtue of owning assets qualifying for APR or BR, e.g., UK farmland (previously EEA farmland before 6 April 2024) and trading business assets/shares respectively may be impacted by a new combined £1,000,000 cap on 100% IHT relief (with 50% relief on assets with value exceeding this). The £1,000,000 cap is being introduced from 6 April 2026, however, precisely how this will apply to new and existing trusts is to be determined. It is anticipated that qualifying agricultural or business property settled before 30 October 2024 will be able to get 100% relief if the qualifying property exits the trust before the next 10-year anniversary that falls after 5 April 2026. New rules may be introduced to prevent settlors creating multiple trusts to utilise multiple £1,000,000 allowances.
Trusts where the settlor or their spouse can benefit will now likely be within the scope of IHT. Where a settlor retains an interest in the trust (e.g. they are a beneficiary) and is long-term UK resident at death, then the Gift With Reservation rules will cause the trust assets to be subject to IHT as part of their estate. This will only apply to UK situated assets if the trust was created prior to 30 October 2024.
Trusts that will benefit from continuing to be classed as Excluded Property Trusts (e.g. due to their settlor having died non-domiciled prior to 30 October 2024) can continue to be outside the scope of IHT as long as they have no UK investments at each 10-year anniversary of the trust.
Trusts that become liable to UK taxation will need to update the Trust Registration Service.
Reference/Citation
Changes to the taxation of non-UK domiciled individuals policy paper | HM Treasury
Summary of reforms to agricultural property relief and business property relief policy paper | HM Treasury
