Changes to offshore trusts in the 2024 budget – no more protection

If you are non-domiciled, deemed domicile or even a UK domiciled individual who has settled or benefits from an offshore trust, the 2024 budget has introduced some drastic changes to the way that the trust will be taxed.

The new budget will remove the concept of domicile from UK law and instead introduces the concept of a Long Term Resident (LTR). Going forward from April 2025 your historic domicile will no longer be relevant for your income tax, capital gains tax or inheritance tax position. The remittance basis has been removed with a 4 year tax free window for foreign income and gains, but more importantly after being resident in the UK for at least 10 of the past 20 years an individual becomes an LTR.

The consequence of becoming an LTR under the new rules is that they are immediately subject to inheritance tax on their worldwide assets (similar to being deemed domicile under the current 15/20 year rule).

Many non-doms have planned for becoming subject to IHT on their worldwide assets by settling offshore trusts, which were provided “protected” status in 2017, as long as they didn’t do anything to taint the trust.

PROTECTED STATUS IS REMOVED

The first thing to note is that the 2024 changes remove the protection from attribution of foreign income and gains where the settlor is an LTR. This means all income and gains belonging to a trust will be attributed to a UK LTR settlor on an arising basis where the settlor can benefit from the trust. For the first 4 years of residence this will be tax free, under the new FIG regime, but after this it will all be taxable on an arising basis.

The second and more drastic change is that an offshore trust which has a UK LTR settlor will now be subject to the relevant property rules from 6 April 2025. This means that the trust will be subject to entry, exit and 10 year periodic charges.

The 10 year charge is based on a 6% charge every 10 years. The value of the trust, less the nil rate band will be charged to tax at 6% every 10th anniversary, with a pro-rating for the first 10th anniversary.

IHT CHARGES ON OFFSHORE TRUSTS

Where a non-dom settlor has been in the UK for at least 10 years in April 2025 this means that the trust will immediately cease to be excluded property from 6 April 2025. I’ll give some simple examples below, but please accept that at this stage we have limited information and no definitive legislation:

Assuming a trust was established in 2019 by a non-dom, who has now been resident in the UK for at least 10 years, the first 10 year charge will be in 2029. In simple terms the charge will be pro-rated by 4/10 years as this is the number of years in the new regime. Assuming the trust hold £15m in assets at that point the calculation will be as follows:

Trust assets	£15,000,000
Less Nil rate bands	(£650,000)
Taxable	£14,350,000
Tax rate 6% x 4/10	2.4%
Tax charge @2.4%	£344,400

Exit charges will be based on a pro-rated charge base on the last 10 year charge, multiplied by the value withdrawn.

This means that if on 6 April 2031, 2 years after paying the above 10 year charge (2.4%) you withdraw £500,000 from the trust there would be a charge as follows:

Assets under charge	£500,000
Tax rate 2.4% x2/10	0.48%
Charge	£2,400

If a settlor becomes a long term resident and then later ceases to be a long term resident then there will be an exit charge based on their period of Long Term Residence.

For example if the settlor of the above trust stays until say 2033 (4 years after the 10th anniversary) and the value was £18m the charge would be in the region of:

Value	£18,000,000
Tax rate 2.4% x 4/10	0.96%
Tax charge to exit	£172,800

If the settlor were to stay until the 20th anniversary of the trust when it was worth say £20,000,000 the charge would be:

Trust assets	£20,000,000
Less Nil rate bands	(£650,000)
Taxable	£19,350,000
Tax rate	6%
Tax charge @6%	£1,161,000

It is important to note that these charges apply regardless of whether the settlor can benefit or not.

WHAT TO DO NOW

Many families with offshore trusts will now be in a quandary. Do they:
1. Retain the trust and accept the ongoing 10 year IHT charges and likely attribution of offshore income?
2. Wind up the trust and distribute the income to the UK (possibly taking advantage of the reduced Temporary Repatriation Facility)
3. Leave the UK altogether (an increasingly attractive option for many wealthy non-doms)

However, the first thing you should do is take formal advice.

Fusion Partners are specialists in UK based offshore taxation, trusts, estates and high net worth individuals.

Contact us at info@fusionpartners.co.uk or book an appointment with Anthony