Changes to the UK non-domicile regime: Planning points for Offshore Trustees

Additionally, these changes will heavily affect a large number of non-domiciled or deemed-domiciled individuals in the UK, who are either settlors or beneficiaries of offshore structures. The precise details of the proposals will become clearer in the run-up to 5 April 2025. In the meantime, Trustees will want to explore how best to navigate the new rules and position themselves prior to 6 April 2025.

Changes for offshore trusts (in brief)

1. Trust protections for income and gains arising in protected trusts will cease from 6 April 2025.
2. . Future foreign income and gains arising to settlor interested protected trusts will be taxed on UK resident settlors who have been resident in the UK for more than
   four tax years.
3.  Inheritance Tax protections will remain in place for foreign assets held by offshore settlements created prior to 5 April 2025 by a non-domiciled settlor.
4.  Further details on the changes can be found here.

Planning opportunities and updating investment strategies

With the loss of the ability to roll up income and gains UK tax free within the trust, Trustees may need to revise their investment strategy. This may involve the use of roll-up funds or insurance wrappers, though the tax implications of using these may be significant. Depending on the intentions of the beneficiaries, it may be that a mix of investment strategies are required.

Excluding individuals from benefiting

Trustees may consider excluding certain individuals to manage the ongoing UK tax exposure of the trust. Excluding the settlor and their spouse from benefiting should protect against an Income Tax charge, while extending that exclusion to children and grandchildren should protect against a Capital Gains Tax charge arising. However, this will need to align with the settlor and wider family’s objectives for Trust assets.

Making use of the transitional arrangements

Non-domiciled beneficiaries of an offshore trust may use the final year of the remittance basis regime in 2024/25 to receive distributions of non-UK assets and retain them
offshore. These assets could then be brought to the UK between April 2025 and April 2027 with a reduced charge to tax of 12%. Of course, this assumes that there will be no changes to the transitional arrangements between now and the point they come into effect.

Creating a new excluded property settlement

If Inheritance Tax is the overriding concern, a non-domiciled (and non-deemed domiciled) individual could set up a new excluded property trust in 2024/25 to preserve the Inheritance Tax benefits by keeping non-UK situated assets outside the scope of UK Inheritance Tax. However, any income or gains arising within the trust will be taxable on the settlor (if settlor interested and if the settlor has been resident in the UK for more than four years) as it arises post April 2025.

Using UK resident companies

Inserting a non-UK incorporated but UK resident company into the trust structure (or holding a UK company through a non-UK incorporated company) may help protect against
income and gains being attributed to the settlor. Instead of being attributed to the settlor the income and gains are taxed at UK corporate tax rates and income and gains may qualify for relief from UK tax depending on the nature of the investment. Family investment companies have been typically seen as an alternative vehicle to using a trust, but they can be effectively used as part of the same structure to provide flexibility and pass on wealth to the next generation.

Onshoring the trust

To avoid the attribution of income and gains to the settlor following the loss of trust protections it may be appropriate to consider appointing UK resident trustees and bringing the trust onshore. While the income would still be taxable on the settlor (if the settlor or their spouse can benefit) the gains of the trust will then be taxable on the trustees rather than the settlor. It is possible to do this while preserving current Inheritance Tax benefits for non-UK situs assets. However, if the trust were ever to move offshore again an exit charge on unrealised gains would be imposed.

Would you like to know more?

There is no one-size-fits-all solution and until the legislation is published Trustees should exercise caution in making any changes to existing structures. However, taking advice on possible planning opportunities will help Trustees understand the impact of these new rules and put them in the best place to act once the rules become clear.

If you have any questions about the above, please get in touch with your usual Blick Rothenberg contact or Suzanne Briggs or Chris Gillman from the links in their profiles.