Non dom changes and trust – Introduction
In the latest budget announcements, non-domiciled individuals and trusts have been thrust into the spotlight, heralding potentially significant changes to how these trusty trust vehicles might be taxed.
These changes will have key implications for non-UK resident trusts and their beneficiaries.
As we await a more detailed analysis, this article zeroes in on how these changes might affect non-UK resident trusts and those connected to them.
Election handbrake?
Given the changes are set to take effect after an impending election, it’s prudent to consider the likelihood of their implementation.
While the future political landscape could alter these plans, the core aspects of the regime outlined by the Chancellor are anticipated to remain for the 2025/26 fiscal year.
As such. although early planning is considered beneficial, there will be an element that any plans will be built on shifting sands.
Trust-Specific Announcements
General:
The 6 April 2025 will be a watershed moment for trusts in several key areas:
Income and Capital Gains Tax:
The curtain falls on protected trust status come 6 April 2025, regardless of the trust’s establishment date.
Inheritance Tax (IHT):
Trusts formed by 5 April 2025 maintaining their excluded property status will continue to be efficient for IHT purposes on non-UK assets.
The fate of trusts established post-6 April 2025 will hinge on the settlor’s tax residence status at creation and relevant IHT events.
A trust’s IHT dynamics are inherently tied to the settlor’s tax status (at the moment, their domicile) on creation.
From 6 April 2025, it seems that a settlor’s worldwide assets will fall within the UK’s IHT scope after a decade of UK tax residence, extending ten years post-departure.
The ten year tail seems somewhat lopsided when considering the 4 year window for a new arriver to benefit from the new foreign income and gains exemption, and the current ‘tail’ of three years for IHT purposes.
What Does this Mean for Existing Non-UK Resident Trusts?
While trusts without a living settlor seem unaffected, the landscape shifts for trusts with UK resident settlors currently shielded by protected status.
Upon losing this protection in 2025, these trusts will need to meet various anti-avoidance mechanisms head on.
The result is that the trust’s income and gains may be attributed back to the settlor.
While legislative adjustments may refine these rules, their core intent to attribute trust activities to the settlor is likely to persist.
Strategic Steps for Trusts and Settlors
The path forward involves a careful review of current trust arrangements and a proactive approach to navigating potential tax liabilities.
Options range from trust amendment and investment strategy shifts to beneficiary distributions, aiming to mitigate tax exposure while preserving IHT benefits.
Looking Towards New Trusts
Even with looming changes, the window until 5 April 2025 offers an opportunity to create trusts with enduring IHT advantages.
For individuals nearing deemed domicile status or seeking future tax planning vehicles, trusts remain a vital tool, alongside exploring alternatives like Family Investment Companies or insurance-based solutions.
Non dom changes and trust – Conclusion
Last week’s budget undeniably introduces a complex new era for non-domiciled individuals and their trusts.
With planning and guidance, however, it should be possible to ensure the tax position is as optimal as possible heading into this new era.
Time will tell how these changes affect the pulling power of UK PLC as a place for the international elite to live and do business.
If you have any queries, then please let me know.