Taxing Times Ahead: The impact of the 2025 UK tax changes on trusts

What do trustees need to know and what do they need to do?

On 6 April 2025, major tax changes came into effect for UK resident non-UK domiciliaries (non-doms), which also have far-reaching implications for their trusts and trust-like structures.  In this article we consider specifically the impact of these changes on trusts and trustees.

The key features of the new rules mean that from 6 April 2025:

• The remittance basis of taxation has been abolished for foreign income and gains arising in the UK tax year 2025/26 onwards.
• Qualifying new residents (QNRs) of the UK will instead benefit from a four-year regime (4YR) under which they are not taxed on foreign income or foreign gains (FIGs) for the first four years of their UK tax residence.
• A transitional relief, the Temporary Repatriation Facility (TRF), is designed to encourage former remittance basis users (RBUs) to bring into the UK FIGs which arose under the old rules, by taxing them at only 12% (if claimed in 2025/56 or 2026/27), or 15% (if claimed in 2027/28). This is far lower than 45%, which is typically the highest rate of tax that might otherwise apply.
• The concept of “domicile” will no longer be a relevant factor to determine exposure to UK inheritance tax (IHT). Instead, exposure to IHT on non-UK assets will depend on whether a person is a “long term resident” (LTR), meaning they have been resident in the UK for 10 or more of the previous 20 UK tax years.  A trust’s exposure to IHT charges will now depend on whether the settlor is a LTR at the time when the charge arises.
• Specific rules that prevented UK resident settlors from being taxed on the income and gains within certain trusts will be removed. As a result, from 6 April 2025, income and gains arising within these structures (including at underlying company level) will give rise to taxation on the settlor where they have an “interest” in the trust, even if they do not actually receive the income and gains in question.

This article looks at what trustees need to know about the new rules, and what trustees will need to consider now the new regime is in place. 

We will consider the following aspects of the new rules that will impact trusts and trustees in turn:

• The opportunities for trustees relating to the 4YR and transitional reliefs;
• “Un”protected settlements mean that income and gains will now be taxed on UK resident settlors, leading trustees to consider (a) the exclusion of certain beneficiaries and (b) whether the motive defences might apply to the structure;
• How the residence of the settlor will determine a trust’s exposure to IHT (which includes some surprising (even shocking) outcomes); and
• Finally, we provide a ‘dos and don’ts’ check list for trustees in relation to these new rules.

Opportunities (and pitfalls) of distributions to beneficiaries during the 4YR

Trustees will be aware that distributions to UK resident beneficiaries are usually “matched” with accumulated trust income and gains.  This means that a UK resident beneficiary receiving a distribution may be taxed at up to 45% of the value of the distribution (if matched to income) or between 24% and 38.4% (if matched to gains: the rate of tax depends on how long the gains have been held in the structure). 

In a rare piece of “good news”, under the new rules however, if a trust beneficiary is a QNR and is benefitting from the 4YR, then it may be possible to make trust distributions to them tax-free. 

There are complexities in the interaction of the new 4YR with the “matching rules” and the outcome may depend on whether the benefit or distribution is matched to income or capital.  For example, there is a risk that the beneficiary might be subject to tax if the distribution is matched to UK income, or if there is insufficient income in the structure at the time the distribution is made but relevant income later arises in the trust after the beneficiary is no longer claiming the 4YR – potentially resulting in a tax liability at that point. 

Trustees and beneficiaries should take tax advice on how the rules will work in practice, and distributions should be considered on a case-by-case basis.

The TRF may be claimed on trust distributions

The TRF is designed to encourage taxpayers to bring funds that have been kept outside of the UK (to prevent UK tax charges) into the UK within the three UK tax years starting on 6 April 2025 (the TRF window).  In good news for trusts, there are specific provisions that allow the TRF to be claimed by a former RBU in respect of trust distributions made during the TRF window.

The TRF can be used for stockpiled foreign income and gains which arose before 6 April 2025 and remain held in non-UK trusts.  Where distributions of capital are received from offshore trusts in the three UK tax years from 6 April 2025 and such distributions are matched with FIGs arising before 6 April 2025, the recipient beneficiary can use the TRF to pay tax on the FIGs at the lower rate (provided the beneficiary was an RBU in the past).

However, there is scope for this to go very wrong.  For example:

• Where there is both UK and non-UK income available for matching, the UK income cannot be excluded from matching and falls outside the TRF so that it will be matched to the distribution and taxed at the usual income tax rates;
• Where a beneficiary who is eligible for the TRF receives a distribution but chooses not to claim the TRF, this wastes a TRF opportunity as not all funds are eligible for the TRF; and
• The TRF cannot be used in respect of income distributions received from a non-UK trust during the TRF window (as these will be a new source of income for the beneficiary).

Caution re onward gifting

Trustees will already be familiar with the fact that the UK has anti-avoidance provisions which prevent trust distributions being “routed” via a non-UK resident beneficiary who then makes an onward gift to a UK resident (who would have been taxable had they received the trust distribution in the first place).  These rules have been extended to prevent distributions being made to a beneficiary benefitting from the 4YR, who then passes it on to a someone who would not so benefit. 

For example: A and B are both beneficiaries, but A has recently moved to the UK for the first time, whereas B has been UK resident for more than 4 years.  If the trustee makes a distribution to A who receives it tax-free under the 4YR, if A then makes an onward gift to B who is not a QNR, B will be subject to UK tax as though B had received the distribution directly from the trustee.

Bad news for settlors re “un”-protected settlements – but what actions for trustees?  

From 6 April 2025, “protected settlements” will cease to benefit from the rules that prevented income or gains within such structures from being attributed to UK resident settlors with an interest in the trust.  This news is unwelcome for many UK resident settlors who created such trusts in reliance on the rules at that time but will now be subject to UK tax on the income and gains arising in the trusts.

What action should trustees take in respect of such trusts? Broadly, there are three options to consider:

• Can the impact be ameliorated by excluding beneficiaries?
• Can the motive defences assist?
• Can the investment strategy help?

Exclusion might prevent the settlor being taxed on the trust’s income/gains (but such drastic measures may not be palatable)

Excluding the settlor (and the settlor’s spouse) may be helpful to prevent income from being attributed to the settlor, but exclusions are not likely to assist with capital gains tax (CGT) because this would require the exclusion not only of the settlor and settlor’s spouse, but also of any children or remoter descendants (and their spouses too).  For most family trusts, this would mean excluding almost all the beneficiaries, though in the rare cases where the trust was created for, say, nieces and nephews, it may be a sensible step.

When considering making any changes to a trust, including the exclusion of certain beneficiaries, the trustee must consider whether such a step is for the benefit of the class of beneficiaries as a whole.  While shielding one beneficiary – such as the settlor – from tax on income and gains may be a relevant consideration, the trustees must have regard to the interests of all the beneficiaries (although for most family trusts preventing the settlor from having a significant tax liability is likely to benefit the other beneficiaries of the trust, particularly as the settlor may seek to exercise the statutory right to reclaim the tax paid from the trust fund).  

Motive defences might prevent the settlor being taxed on income/gains within the trust structure (if the defences apply no exclusions are needed)

As noted above, once a trust is no longer “protected” UK anti-avoidance legislation can attribute the income and the gains within the trust structure (i.e.  both income and gains received directly by the trustee and that received at underlying company level) to the settlor.  However, if it can be demonstrated that the arrangements were put in place for reasons other than to gain a UK tax advantage, it may be possible to claim the motive defence(s) to prevent such attribution.

The motive defence(s) (plural, as there are different tests in relation to income tax and CGT), will not assist with income or gains received at trust level, but may help to prevent the attribution of income or gains in underlying companies to the settlor.  It is expected that the motive defences will become much more important now that the new tax changes have come into force.

We anticipate that many more trustees will be seeking advice on whether trusts might benefit from the motive defences if the settlors of such trusts remain UK resident.  In certain circumstances the motive defences can help even where a trust was established by a UK resident settlor before the settlor became deemed domiciled, so it is sensible for trustees to review all trusts with a UK resident settlor or UK resident beneficiaries.

The motive defences can be lost as a result of changes made to a trust after it was established. Trustees should therefore take advice regarding the availability of the motive defences before making any changes to a trust structure.

However, the motive defences are under review by the UK Government, but we currently have no detail about proposed changes.  The UK Government has recently announced that no changes will be made until April 2027 at the earliest.

Trustee’s investment strategy should be reviewed 

If the UK resident settlor will be taxable on the income and gains of the trust structure (because the motive defences are not available and it is not possible to exclude beneficiaries), the trustee should review the trust’s investment policy with their advisers.  It might be possible to mitigate the impact of the taxation for the settlor through the investment strategy.

For example, trustees may want to investigate investing the trust fund in a life insurance bond which acts as a wrapper for the investment portfolio and can prevent the attribution of income and gains to a UK resident settlor.  Care needs to be taken with such investments, and it is important not to take any action that might cause the motive defence to be lost, but they can be helpful in the right circumstances.

IHT and trusts: prepare for a shock

Domicile was previously the key concept

It had become common for those who were resident but not domiciled in the UK to settle non-UK assets into a trust before they became deemed domiciled in the UK (i.e.  before reaching 15 out of 20 years of UK residence (or previously 17 out of 20 years)).  

Such trusts were typically “excluded property” trusts: they held non-UK situs assets that were settled into trust when the settlor was non-UK domiciled.  Provided the trust continued to hold non-UK assets, it could be outside the scope of IHT permanently.  This meant that excluded property trusts were not subject to the UK’s “relevant property regime” (RPR) and the trust assets were not subject to IHT on the settlor’s death.

The goal posts have shifted dramatically under the new rules, and it is going to take some time for trustees to fully digest the extent to which existing trusts are now subject to the RPR and are potentially exposed to IHT.

New importance of settlor’s residence

Under the new rules, an IHT charge may arise for a trust at the following times if the settlor is an LTR at the date of the event:

• When funding and adding value to a trust;
• At the trust’s 10-year anniversary;
• On capital distributions; and
• On the trust leaving the UK IHT net, which will also be deemed to occur when a settlor ceases to be an LTR.

Importantly, even if a LTR settlor ceases to be UK resident, the individual will remain an LTR for up to ten years after leaving (i.e.  they will have a “tail” of full exposure to IHT).  It will therefore be very important for the trustee to keep track of the settlor’s residence status.

As a first step, trustees need to identify settlors who are UK resident under the UK’s ‘statutory residence test’ (SRT).  Simply relying on the settlor to self-assess may not be good enough as the rules are complex, especially if the settlor arrived or left part-way during the UK tax year.  A settlor will rarely cease to be tax resident the day they leave the UK.  Professional advice is needed to accurately navigate the SRT.  See our article on this here. 

While the default will be an IHT tail of 10 years, where an individual has been UK resident for no more than 13 tax years of the previous 20 tax years, the tail will be shortened to 3 years.  Where the individual has been UK resident for between 14 and 19 tax years of the previous 20 tax years, there will be a sliding scale tail. 

There are also transitional provisions for those who were non-resident as at 6 April 2025 and remain non-resident, but importantly there is a possible sting in the IHT tail for those who left the UK before 6 April 2025 but were deemed domiciled under the old rules at the time they left.  Under the transitional rules, a person who left the UK before 6 April 2025 but was deemed domiciled in the UK will be treated as being an LTR for three years after they have left the UK.  This means that if the settlor of a trust falls within these rules, the trust will be subject to the IHT charges on distributions of capital during the following three years and on the tenth anniversary of the trust if it falls within the three year period even if the settlor left the UK before 6 April 2025.

To summarise, from 6 April 2025, all trust assets will be within the scope of IHT at any time at which the settlor is an LTR or is still within their IHT tail.  If the settlor is not an LTR and has lost any IHT tail, only UK situated trust assets (and non-UK situated trust assets connected with UK residential property) will be exposed to IHT.

By default, there will also be scope for a 40% IHT charge on the value of the trust fund when the settlor dies if the settlor is a beneficiary, can be added as a beneficiary, or can revoke the trust, and the settlor is a LTR at the time of his or her death.  There are, however, some transitional provisions here which may help trusts in existence on Budget Day (30 October 2024).  The trustee may want to take advice on amending the terms of the trust in order to improve the IHT position, although care should be taken regarding the effect of changes to the trust (such as making it irrevocable) in any other relevant jurisdictions.

As well as reviewing the tax position, trustees will also need to ensure they understand whether their trusts are/will be required to be registered with the UK’s Trust Registration Service (the TRS).

Trust to trust transfers

Transferring assets between trusts can have complicated tax and reporting outcomes for the recipient trust as the assets moved between the trusts will be usually be treated as remaining in the first trust for IHT purposes. This means that in order to file returns as necessary for ten year charges it will be important for the trustee to have a full history of each trust, and to understand whether any trust to trust transfers have taken place.

Actions for trustees – A checklist

Gather details on the residency status of settlors and beneficiaries

• Check the residency status of settlors (including what their IHT tails are under the new rules).
• Investigate the details of when they arrived/left the UK, including where they have a home available to them and their work status.
• Seek professional advice to confirm when settlors became UK tax resident (and pay special attention to any settlors who have been UK resident for nine of the previous twenty tax years).
• Look out for particular complexities that will arise if the settlor’s UK residence began before 2013 (when the SRT was introduced) or if they have been claiming ‘treaty’ residence outside the UK under a double tax treaty.
• Check the residence status of beneficiaries, whether they qualify for the 4YR, and whether they can claim the TRF.
• Don’t automatically assume a settlor is correct when they say they are non-UK resident.  Ask to see professional advice.

If a UK resident settlor will become taxable on the income and gains arising in the trust structure

• Check who can benefit from the trust and who is excluded – are any of the settlor, their spouse, and/or their children and grandchildren and spouses irrevocably excluded?
• Consider whether excluding beneficiaries is an option.  Excluding the settlor and their spouse from the trust could protect against income tax, whilst also excluding their descendants could protect from CGT.  However, this will not work in many cases and the trustees will need to ensure any exclusions align with the settlor’s wishes and the wider objectives of the trust.
• Consider if the motive defences will apply to prevent the attribution of income and gains within the structure to the settlor. 
• Consider whether some form of “wrapper” within the trust structure can defer the income/gains charges on the settlor.
• Take advice before making any changes to the structure as trusts with the benefit of the motive defences could lose them!
• Don’t assume a trust created shortly before the settlor became deemed domiciled in the UK won’t benefit at all from the motive defences.

Planning for distributions of income and gains including maximising the TRF

• Seek professional advice to understand the trust’s income/gains tax position going forward.
• Consider whether the motive defence(s) should be explored.
• Consider mitigation steps, such as full or partial exclusions of settlor/beneficiaries.
• Check whether the settlor has a right to reclaim tax paid from the trust fund.
• Segregate income and gains that arose in the trust before 6 April 2025, and open new accounts for post-April 2025 income and gains.
• Check whether beneficiaries can benefit from the TRF and consider whether it is beneficial to maximise this.
• Check whether beneficiaries will be claiming the 4YR.
• Don’t undertake distributions or restructuring without considering the motive defences and whether the TRF is available.

Understanding when trusts will be within the IHT “relevant property regime”

• Identify living settlors who are UK resident (or have been within the last 20 years (including those who have recently left!)).
• Identify trusts which now fall into the scope of the RPR and when IHT charges will be payable (i.e.  periodic charges, entry charges, charges on distributions, and when a settlor ceases to be an LTR). 
• Check whether registration with the TRS will be required.
• Diarise ten-year anniversary dates (since the creation of the trust).
• Note any ‘trust to trust’ transfers which may need special consideration.
• Don’t assume that if the settlor has recently left the UK the relevant property regime will not apply to the trust, as the settlor may have an IHT tail.
• Don’t move assets between trusts with a settlor who is LTR without taking professional advice.

Review investment strategy

• If income and gains of the trust will be attributed to the settlor going forwards, consider longer term growth assets giving rise to capital gains, rather than income producing assets (as income is taxed at higher rates).
• Consider the use of ‘wrappers’ as discussed above.

Conclusion

The new rules are complex and there is scope for them to be misconstrued. Trustees must ensure they take action now to prevent unexpected or adverse tax consequences for the trusts that they manage. 

Seeking professional advice will be crucial for trustees to navigate the new tax rules, maximise the benefits that are applicable, and avoid potential pitfalls. By proactively addressing these issues, trustees can optimise the options available to them and safeguard the interests of beneficiaries and settlors.

We offer a high level review of trusts for a fixed fee to help trustees check whether there are any issues that need to be considered.  Please get in touch with us to find out more.