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Non-domicile changes – Trust protection

Navigating personal and business tax complexities for non-domiciled individuals

The abolition of the non-dom tax regime

In the Spring Budget 2024 Jeremy Hunt announced the abolition of the non-dom tax regime and a new modernised ‘tax holiday’ for individuals moving to the UK.

It is one of the most significant reforms to the non-dom tax regime in our generation. Many affected individuals will now face a dilemma due to the proposed rules, in terms of both their existing structures and ongoing exposure to UK Tax.

Trust Protection

UK resident non-domiciled individuals can currently benefit from a tax-free roll up of non-UK income and gains where assets are held in a trust structure. From 6 April 2025 the existing trust protection will cease.

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At present, a generous tax regime exists for a non-UK resident trust which has been settled by a non-UK domiciled settlor who is UK resident. Foreign income and gains within such a trust are not subject to UK tax in the hands of the UK resident settlor, in contrast to the position if the settlor was UK-domiciled.

At present, a generous tax regime exists for a non-UK resident trust which has been settled by a non-UK domiciled settlor who is UK resident. Foreign income and gains within such a trust are not subject to UK tax in the hands of the UK resident settlor, in contrast to the position if the settlor was UK-domiciled.

The proposed changes remove these protections from 6 April 2025 onwards, regardless of when the trust was (or is) established. This means that if a settlor has been UK resident for four or more years, they will be subject to UK tax on the foreign income and gains of the trust, as they arise.

The sudden impact of this could be partly mitigated by the transitional changes, but there are also some steps that can be considered before 6 April 2025 to help lessen the impact:

  • 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.
  • 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.
  • 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.
  • Leave the UK: If the settlor becomes non-resident prior to 6 April 2025, they should not be subject to the new regime.
  • Collapse the trust entirely: This will clearly eliminate the problem entirely but may have significant tax implications itself and will need careful consideration.

How we can help

If you would like to discuss the implications of these changes on your trust structure, please get in touch with your usual Blick Rothenberg contact, or one of the team using the form below.

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