I am receiving questions from various lawyers around the world about how the recently announced changes may affect families living outside the UK with children or grandchildren in the UK.
Subject to potential changes in the draft legislation, here are the main points these families should know for now.
- The test for whether someone is living in the UK (i.e. UK resident) is unchanged: it involves a few tests, but so long as a person is not here for more than 90 days in each tax-year they are unlikely to be UK resident. Advice should be taken where UK residence is possible. Other points assume someone is UK resident under this test.
- The rules are changing for how people are taxed when they move to the UK: The first 4 years will provide total exemption from tax on most non-UK income and gains. After those initial 4 years, tax will be payable on all income and gains worldwide, including on assets they have transferred into a Trust. After 10 years of UK residence (what is now being called ‘long-term resident’), that person will also be subject to UK IHT rules on their own assets and on assets they have transferred into a Trust.
- If a beneficiary of a Trust moves to the UK, that will not directly change the tax status of the Trust. Note that there are consequences if they were also the Settlor of the Trust (that is the person who funded the Trust), but that is unlikely in the example here. UK residents will not be taxed on benefits they receive from an offshore Trust during the 4 years after they first move to the UK. After that, UK residents will be subject to tax on benefits they receive from an offshore Trust, matching those benefits to income and/or gains in the offshore Trust, with tax of up to 45%. This is the same as the existing treatment. The IHT treatment of the Trust will be unchanged by a beneficiary becoming UK resident.
- There is one important exception for new Will Trusts going forwards: where the Trust is created (or funded) on the death of the Settlor, and where the beneficiary is entitled to receive the income of the Trust from the date of death, the assets of the Trust will be subject to IHT as if they belonged directly to that beneficiary, and so will be subject to IHT if the beneficiary is long-term resident in the UK when they die. Existing non-UK Trusts that give beneficiaries a right to receive income should be reviewed to make sure that they continue to be protected after the death of that beneficiary – the transitional protections may cease to apply in some cases.
- There are no proposed changes to any of the international IHT Double Tax Conventions, which are intended to remain fully in force. This may be particularly relevant to families based in India due to how that Convention operates.
- Anyone who has previously lived in the UK, and who settled any Trusts subject to the UK IHT rules, should take advice on their Trusts – the ongoing IHT charge every 10 years may cease in April 2025, triggering an immediate (but smaller) IHT exit charge on that date.
Most families outside the UK will still be able to provide support for their relatives in the UK, and the tax treatment remains much as it was. In fact, the tax treatment in the first four years of a relative living in the UK is improved from 6 April 2025 (previously income/gains would need to have been kept outside the UK).
However, in Wills it would be prudent to make sure that no beneficiary has an immediate legal right to receive income from any Will Trusts if there is any risk that beneficiary could become long-term UK resident before they die. In some cases this may prove unavoidable due to the need to give a right to income for spouse relief – in these cases the surviving spouse will need to keep in mind the potential UK tax exposure on the Trust.
Care should certainly be taken with Trusts and advice will remain crucial in how best to provide for UK resident family members.
I will be very happy to assist any clients (or their advisors) based overseas with understanding the changes.
Jacob Cork – 1 November 2024
