Background: Abolition of Domicile and Rise of the Residence-Based Regime
As of 6 April 2025, the UK replaced the outdated concept of domicile with a residence-based tax regime. Under this, UK long-term residents (10 out of 20 years) are taxed on foreign income, gains, and non-UK assets held in trusts. (gov.uk)
Trusts: Exit Charges and Cap on Relevant Property
For trusts settled by formerly non-domiciled individuals holding excluded property on 30 October 2024, new rules cap the inheritance tax relevant property charges to £5 million per 10-year cycle, effective from 6 April 2025. (gov.uk)
These reforms include:
- Making non-UK assets in trusts subject to IHT if settled by long-term UK residents.
- A transitional cap for trusts already holding excluded property before 30 October 2024.
- Estate and trust-level planning needed to address exit charges and preserved benefits.
Practical Strategy for Entity Setup and Trust Owners
- Assess trust architecture: identify trusts settled before or after 30 October 2024. Those before can benefit from the cap; those after may be fully exposed to charges.
- Evaluate exits and ten-year charges: plan distributions or exit events to align with 10-year cycles and manage exposure to IHT.
- Documentation and valuation: confirm property is ‘excluded’ as of relevant date; ensure updated valuations and accurate records.
Illustration
- Trust settled in 2023 by formerly non-domiciled individual holds £10m of non-UK investments as excluded property. From 6 April 2025, only up to £5m relevant property trust charges per cycle are applicable; the rest should be protected under the cap.
- Trusts created in 2025 onward are fully in scope, without cap, for any non-UK property they hold.
Setup Tips Before Key Dates
- Finalise trust deeds and settlements before 30 October 2024 if possible—or verify status.
- For new entity structures, consider consulting on whether trust vs non-trust, or corporate holding structures, may be more beneficial.
- Identify whether carried interest or pension benefits could interact with trust or estate IHT exposure.
For entity setups and legacy structures, understanding these caps and exit-edge exposures can drive smarter planning and considerable savings.