Katie Doyle
Legal Director, Private Wealth and Tax
So the new tax regime affecting non-domiciliaries came into force on the 6 April and with that some substantially different rules that will affect trusts. Non-UK resident trustees of course need to get used to these new rules because there are so many individuals affected to those trusts, namely settlors and beneficiaries that will be affected the new rules. Can you speak to some of the considerations that trustees will need to take into account?
Moustapha Hammoud
Managing Associate, Private Wealth and Tax
Yeah, so, yeah, the new rules are significant and complex so I’ll try my best to, to summarise those. So the most significant change for trustees is that the trust protections which were introduced in 2017 which allowed UK resident non-dom settlors to establish trusts, which benefitted from various trust protections are no longer in effect so that means if those same UK resident settlors cannot benefit from the four year FIG relief regime will be subject to the income and gains in the trust as they arise. Now that is a huge and significant shift in the tax and trust world. Now in certain circumstances it’s possible to manage or mitigate a settlor’s exposure to UK tax so from an income tax point of view, it’s possible to exclude the settlor and their spouse or civil partner so as to limit the arising basis which would apply. The rules are different for capital gains tax perspective because there needs to be a more broader exclusion in terms of who can be the beneficiaries. Now for CGT purposes, not only would the settlor, their spouse or civil partner need to be excluded, but their children, grandchildren and a wider class of beneficiaries would need to be excluded, so that means that trustees and settlors need to be more conscious of the tax profile of the trust. Now obviously, these change may negate the objectives behind setting up the trust in the first place. So Katie, we’ve talked about how the income tax and capital gains tax changes could impact trustees and settlors, the other tax that we need to consider is inheritance tax and there has been a significant change to the way in which inheritance tax applies to trusts. So the starting point now from the 6 April 2025 is that domicile is no longer a connecting factor from an inheritance tax point of view, rather the connecting factor will be a settlor’s residence position and so if a settlor is or has been UK tax resident for ten out of the last twenty UK tax years, then they will be considered a long term resident. So that means that residence rather than necessarily the situs of the assets held by the trust or the domicile of the settlor becomes relevant. In that context, what that means is trustees should make sure that they maintain a good communication line with settlors for various reasons of course, but in this particular context they should maintain communication because the residence position of the settlor will affect the tax profile of the trust going forward, for instance, the ten year anniversary charge will apply to the trust if the settlor is a long term resident and also the exit charge could apply to the trust if the settlor ceases to be UK resident and so as I said, they should maintain a good, good line of communication with one another.
Katie Doyle
Legal Director, Private Wealth and Tax
Absolutely, and I also think trustees need to be aware of the temporary repatriation facility or TRF, whereby individuals can remit to the UK pre 6 April FIG at reduced tax rates during the TRF window which ends on the 6 April 2028. For tax years 25/26 and ‘26/27 the reduced tax rate is 12% and for the tax year 27/28 the reduced tax rate is 15%. So in the context of trusts, only pre-6 April FIG can be designated under the TRF so, when a beneficiary is receiving a distribution and the matching rules apply, the distribution has to be matched to pre-6 April FIG for the lower tax rates to apply. Provided that’s the case, the usual CGT and income tax rates won’t apply and instead the beneficiary will be taxed at the reduced TRF rates, 12% or 15% depending on the relevant tax year, on the distribution. On the other hand, if the distribution is matched to post-5 April 2025 FIG, the distribution will be taxed at the beneficiary’s usual marginal rates. It’s still going to be important to segregate the pre-6 April income and gains from the post-6 April income and gains and also to maintain any pre-existing clean capital because the old remittance basis rules will continue to apply in some cases.