Offshore Trusts and Inheritance Tax (IHT)

In recent times, the UK’s approach to Inheritance Tax (IHT) concerning offshore trusts has undergone significant changes. Notably, the 2024 Autumn Budget introduced reforms that impact how offshore trusts are taxed. Understanding these changes is necessary for effective estate planning and ensuring you do not fall foul of the current regulations.

What is an Offshore Trust, and why have one?

An offshore trust is a trust established in a jurisdiction outside the UK which is managed by non-UK resident trustees.

For certain individuals, offshore trusts can have UK tax advantages as well as non-tax advantages such as succession planning and wealth protection.

The jurisdictions themselves may also have favourable tax and privacy laws, although successive changes to legislation have been aimed at making such structures more transparent.

What is IHT?

IHT is a tax which may be charged on certain lifetime gifts, an individual’s estate on death and on certain types of trust.

The IHT rate on individual’s death is 40% and it is applied to the value of the estate of the deceased exceeding the Nil-Rate Band (NRB), which remains at £325,000. There is also the Residence Nil-Rate Band (RNRB) of £175,000 which is an additional allowance when passing on your main home, with a tapering mechanism starting at estates valued over £2 million.

These thresholds are fixed until 2030 as per the Autumn Budget. If passing your assets to a spouse, there is no IHT charge and your thresholds will subsequently become £650,000/£1,000,000 when the second spouse passes.

For further guidance on IHT planning, consider reading our guide to Inheritance Tax Planning.

How and when does IHT apply to offshore trusts?

Historically, offshore trusts offered non-UK domiciled individuals a means to keep non-UK assets outside the scope of IHT.  As such, under the old rules, non-UK assets held within a settlement were regarded as excluded property (bar an indirect holding in UK residential property), provided the settlor was neither UK domiciled nor deemed UK domiciled at the time such assets were transferred into the trust.

However, in light of the changes following the Autumn Budget, from 6 April 2025, IHT is no longer based on the concept of domicile, but rather on a new long-term residence test. An individual is treated as being long-term resident, provided they have been UK tax resident for 10 of the last 20 tax years immediately preceding the tax year in which a chargeable event occurs.

As a result, excluded property status of non-UK assets settled into a trust will depend on whether the settlor is long-term resident at a time when a chargeable event occurs. This means that non-UK assets will come into (i.e. become relevant property) and out of the IHT charge (i.e. become excluded property) based on the settlor’s long-term residence status at the date of each chargeable event.

Where there is direct or indirect ownership of UK residential property within an offshore trust structure, this will continue to remain within the charge to IHT from 6 April 2025, regardless of the long-term residence status of the settlor.

The four chargeable events in relation to offshore trusts that could trigger UK IHT can best be described as follows:

1. When transferring or gifting UK assets into a trust – also known as the Chargeable Lifetime Transfer (CLT) charge which could result in an immediate 20% charge being applied to the extent that the value transferred exceeds the NRB.
2. Upon the 10-year anniversary of the trust creation – A maximum charge of 6% will be charged on UK situs assets in excess of the NRB.
3. When relevant property leaves the trust – Also known as the exit charge, which is calculated as a proportion of the 10-yearly principal charge rate.
4. On death of the settlor provided the Gift with Reservation of Benefits (GWROB) apply – GWROB applies where the settlor is a long-term resident and is not excluded as a beneficiary of the trust.

What needs to be considered in light of the new rules

• How many years have you been resident in the UK in the last 20 tax years? This may be relevant as your worldwide assets may now be subject to UK IHT.
• Are you a long-term resident and planning on relocating elsewhere? Then be aware of the IHT tail whereby IHT could apply on your worldwide assets from three to up to 10 years following your UK departure.
• Are you a long-term resident establishing an offshore trust? Then be mindful that both UK and non-UK assets within the trust are now subject to UK IHT.
• Are you a long-term resident who settled non-UK assets in an offshore trust and are you now considering becoming non-UK resident? Be mindful that once you cease to be a long-term resident, the non-UK relevant property held within a trust becomes excluded property, which will trigger an IHT exit charge.
• Did you settle any non‑UK assets into a trust before 30 October 2024? Please review your situation carefully as transitional rules could apply – depending on your domicile status as at 30 October 2024 as well as other conditions, your non-UK assets may not be subject to GWROB.

Summary

The landscape of IHT and offshore trusts is ever changing, with recent reforms showing just how important it is to be proactive in succession planning. Given the complexities and tax implications, seeking professional advice is crucial.

If you require assistance with offshore trusts or IHT planning, please contact our International Tax specialists to navigate these changes effectively.