What do UK residents need to know about Inheritance Tax changes for offshore trusts?

By James Thomson ATT CTA, Tax Manager at Grunberg & Co.

The UK taxation of offshore trusts is set for reform, with changes to take effect from 6 April 2025.

While much of the detail remains in draft form, these proposals mark a substantial change, particularly in how Inheritance Tax (IHT) applies to trusts with UK resident beneficiaries.

In this article, we will focus on the key IHT changes affecting offshore trusts, who will be impacted, and what trustees and beneficiaries need to consider ahead of time.

Will your offshore trust be impacted?

The upcoming reforms will not apply to all foreign trusts with UK resident beneficiaries.

However, your trust may be affected if any of the following conditions apply:

• The UK resident beneficiaries have historically been non-UK domiciled and claimed the remittance basis or Business Investment Relief (BIR)
• The beneficiaries have become a UK resident within the last four tax years
• The beneficiaries receive over £3,000 in capital payments and distributions from the trust
• The trust was established as an Excluded Property Trust and has a living, long-term UK resident settlor
• The trust previously avoided IHT liabilities due to owning assets qualifying for Agricultural Property Relief (APR) or Business Relief (BR) (formerly known as Business Property Relief (BPR))
• The trust previously had low levels of UK income and was not required to report to HMRC

Any trusts that now fall within the scope of UK taxation must be updated on the Trust Registration Service (TRS) and obtain a ten-digit Unique Taxpayer Reference (UTR).

Major Inheritance Tax changes from 6 April 2025

One of the biggest changes concerns the treatment of Excluded Property Trusts, typically used by non-UK domiciled individuals (non-doms) to shield foreign assets from UK IHT.

Under current rules, if a settlor is non-domiciled when they establish a trust, foreign assets held in that trust are excluded from UK IHT, (even after they later become deemed domiciled) unless they were born in the UK.

This protection is about to change.

From 6 April 2025, trusts will lose their IHT protection if:

• The settlor becomes UK domiciled for any reason, or;
• The settlor has been a UK resident for ten of the last 20 tax years, as determined by the Statutory Residence Test

This marks a move away from domicile-based rules to a residency-based system.

What does this mean in practice?

Offshore trusts may now face UK IHT in the form of:

• Exit charges of up to six per cent on capital distributions
• Exposure to the ten-year principal charge

Several factors will influence the IHT exposure, including:

• The age of the trust
• Whether IHT was payable at a previous 10-year anniversary
• Any other gifts or trusts created by the settlor in the seven years before settling the trust

New cap on Agricultural and Business Relief

Trusts holding assets qualifying for Agricultural Property Relief (APR) or Business Relief (BR), such as UK farmland or shares in trading businesses, will face a new combined cap on relief.

Trusts that were not liable to IHT by virtue of owning assets qualifying for APR or BR, e.g. UK farmland (previously all EEA farmland before 6 April 2024) and trading business assets/shares respectively, may also be impacted from 6 April 2026by a new combined £1 million cap on 100 per cent IHT relief (with 50 per cent relief on assets with value exceeding this).

Precise details on how this will apply to existing and new trusts are still being clarified. However, assets settled before 30 October 2024 may still qualify for full relief if removed before the next 10-year anniversary after 5 April 2026.

There is also the possibility of anti-avoidance rules preventing the creation of multiple trusts to utilise multiple allowances.

Gift With Reservation rules and settlor-interested trusts

Trusts where the settlor or their spouse can benefit (known as settlor-interested trusts), will likely be brought within the scope of IHT if the settlor is a long-term UK resident at death.

Under the revised Gift With Reservation rules, the value of such trust assets may be subject to IHT as part of the settlor’s estate.

For trusts created before 30 October 2024, these rules will apply only to UK-situated assets.

Offshore settlor-interested trusts set up by non-domiciled settlors were previously outside the scope of these provisions.

Watch out for loans and UK residential property

Additional anti-avoidance rules will target loans involving UK residential property.

The loan could be classified as a ‘relevant loan’, making it liable to IHT principal and exit charges, if an Excluded Property Trust:

• Makes a loan to finance, maintain, or enhance UK residential property
• Acquires a close company or partnership owning such property

Conversely, loans made to offshore trusts to acquire, maintain, or enhance UK residential property (or acquire a close company or partnership owning such property) would not be excluded property in the hands of the donor.

Continuing protection for certain trusts

Trusts that will benefit from continuing to be classed as Excluded Property Trusts (e.g. due to their settlor having continued to be non-resident and non-domiciled as of their death prior to 30 October 2024) can continue to be outside the scope of IHT as long as they have no UK investments at the point of each 10-year anniversary of the trust.

What should trustees and beneficiaries do next?

With changes on the horizon, trustees and UK resident beneficiaries should review their offshore trust arrangements.

Understanding whether your trust is likely to be caught by these reforms and planning ahead will be required to minimise your exposure to unexpected IHT charges.

If you would like expert advice on how the upcoming Inheritance Tax changes may affect your trust, please contact us today.