Upcoming Changes in UK Tax Law: What Trustees Need to Know

The Budget made significant changes to the tax treatment of non-domiciled individuals, and there are changes also for trusts. The government will put forward draft legislation shortly, which will be included in the Finance Bill which they will look to pass in the summer, and the intention is that the changes will come into effect from 6th April 2025. Even if there is a change of government in the meantime, these changes may still be introduced. There is some consultation proposed in relation to inheritance tax, but there is no intention to consult on the changes to income tax and capital gains tax. There is however a window of opportunity to take action before they come into effect.

Income tax and capital gains tax

One very significant change is that the “protected trust” regime for trusts settled by non-UK domiciled individuals who are UK tax resident will cease to apply from 6th April 2025. This applies to existing trusts, not just to newly-settled trusts. A trust which meets the conditions for this regime provides significant income tax and capital gains tax advantages for trusts in which the settlor has an interest. Furthermore, when trust distributions are made to UK resident non-domiciled individuals, the remittance basis will no longer be available.

Since a protected trust is one which satisfies the tax conditions, rather than being a specific type of trust, it may not be immediately obvious which trusts are affected. Although the protected trust regime was introduced in April 2017, trusts established before that date which have met the tax conditions are within the regime. Settlors of such trusts will therefore be considering the impact of the changes. There may be options that can be pursued to mitigate the impact of the new legislation, which can be considered further when the draft legislation is available.

Inheritance tax

A consultation will be launched on significant changes that are proposed to the application of UK inheritance tax to non-domiciled individuals. The proposal is that non-doms will come within the scope of UK inheritance tax on their worldwide assets after they have been UK tax resident for 10 years, and will remain within the scope for 10 years after they cease to be UK tax resident.

However, the documents that were published say that where a non-UK domiciled settlor settles non-UK situs assets into an offshore trust before 6th April 2025, the excluded property status of such assets for UK inheritance tax will continue. That is, the assets will remain outside the scope of UK inheritance tax for both the individual and the ten-yearly charge regime for trusts.

The non-UK assets of those individuals who have been UK resident for 10 years, but are non-UK domiciled and non-UK deemed domiciled, will come into the scope of UK inheritance tax for the first time from 6th April 2025, unless they settle such assets into trust. Their alternative would be to take out sufficient life insurance, and so for larger estates, an overseas trust is likely to be an attractive option in many cases.

The transitional rules which allow rebasing of assets for capital gains tax purposes, the repatriation period for overseas income and gains to be remitted and taxed at 12% between 6 April 2025 and 5 April 2027, and the 50% reduction in the rate at which overseas income will be taxed in 2025/26 are all factors that will interact with decisions to be made on settling further assets in trust and restructuring of those assets already held in trust.

At this very early stage it is impossible to reach any firm conclusions about potential steps to optimise the position in individual cases, but we will be happy to discuss these changes with you in further detail.

Contact us if you would like to discuss these changes and the potential planning opportunities.

Trident Tax