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Offshore trusts with UK resident settlors: Last chance to restructure?

Posted on 5 July 2024

Now that we have a new Government, it is inevitable there will be a change in the non-dom regime. We know the journey of travel, but we still have no detail.

During the Spring Budget 2024, the then Government proposed that existing excluded property trusts would continue to benefit from Inheritance Tax protection despite the other proposed changes. Shortly after, Labour said that they would go further and indicated there would be no grandfathering of existing trusts. Unless lobbying efforts are successful, it is safe to assume that even existing excluded property trusts will no longer benefit from IHT protection from April 2025. If the settlor is a long-term UK resident and also a beneficiary of the trust, then not only will trust assets become subject to periodic IHT charges but they will also form part of the settlor's estate on death and therefore subject to inheritance tax at 40%. This is a very significant change and could have enormous implications for many trusts, particularly where the settlor is older or in poor health and so the risk is greater.

Regarding income tax and capital gains tax, the original Conservative proposals provided that the shield afforded to existing "protected settlements" will be abolished from 6 April 2025. Foreign income and gains within trusts will be taxable on the settlor on an arising basis as if they owned the trust assets personally.

Serious consideration should now be given to whether the settlor can afford to give up being a beneficiary of the trust, either in whole or in part. If so, steps can be taken now that should preserve existing tax protections. Ideally, any planning steps would be deferred until after draft legislation has been published. However, given the potentially significant tax implications, the trustees and the settlor may not have the luxury of waiting. Any restructuring implemented after Labour's first budget, likely to be in September, may be too late if anti-forestalling measures are announced.

For those non-doms with significant personally-owned assets, there may also be a last opportunity to add surplus assets to their existing trust, or create a new trust, and benefit from the current generous tax regime.

If you would like to discuss potential trust restructuring, please contact Andrew Goldstone or Lauren Marlow.

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