There were various announcements made at the Budget on 30 October 2024. One of these was the upcoming abolition of the “non-dom” tax regime, which is the biggest change to the taxation of non-UK domiciliaries since 2017.
From 6 April 2025, the legal concept of domicile will no longer be relevant to an individual’s UK tax position. Instead, a new residence-based regime will be introduced, under which an individual will be treated as a ‘long-term’ resident if they have been UK resident for 10 tax years out of the previous 20 tax years immediately preceding the year in which the chargeable event (for example, the creation of a Trust, or death) occurs. Where an individual has been resident in the UK for fewer than 20 years and then leaves, the number of years for which they remain within the scope of UK IHT will be reduced.
As well as having a significant impact on individuals, this new residence-based regime will also impact Trusts, including:
- Trusts settled by non-UK domiciled individuals; and
- Trusts where the settlor’s residence status changes.
Currently, a Trust’s UK IHT status is determined by the settlor’s domicile position at the point the Trust was created, regardless of whether their domicile subsequently changes. Non-UK property (aside from any indirect holdings in UK residential property) settled in Trust by a non-UK domiciled individual is outside the scope of UK IHT. Where the settlor of a Trust dies before 6 April 2025, this rule will still apply.
However, from 6 April 2025, the IHT status of a Trust will be determined by the settlor’s (and in certain circumstances, the beneficiary’s) residence position at that time i.e. the settlor’s movements could result in a Trust moving in and out of the scope of UK IHT. For example, if the settlor becomes a long-term resident in the UK, then the Trust will also come within the scope of IHT. Conversely, Trusts which have previously been within the scope of IHT may fall outside the scope if the settlor leaves the UK for long enough to lose their long-term resident status. Where a settlor dies on or after 6 April 2025, then the IHT status of the Trust will be determined by the settlor’s long-term residence status at their death.
The impact of a Trust’s IHT status determines the tax charges, if any, which may apply in the Trust’s lifetime. Trusts within the scope of IHT are known as ‘Relevant Property Trusts’ (RPTs) and may face tax liabilities every ten years and on appointments of property out of the Trust to beneficiaries. Trusts outside the scope of IHT are known as ‘Excluded Property Trusts’ (EPTs) and are not usually subject to these charges. It will be important for Trustees to consider whether the IHT status of the Trust will change when the new rules are introduced on 6 April 2025 (i.e. from an EPT to an RPT, or vice versa), as this could give rise to unanticipated tax charges.
The “non-dom” reforms announced will also impact the taxation of Trusts where the settlor (or their spouse / civil partner) has retained a benefit in the property settled, as well as distributions made by Trustees to beneficiaries.
It is important to take advice if any of the above changes might affect you. If you would like our assistance, please do reach out to your usual CKLG contact or email esther.mcvee@cklg.co.uk who will be able to put you in touch with one of our team.
Please note that the above has been written based on the current version of draft legislation released by the government, which is subject to change.
