This is the second in the two-part series on the proposed tax changes in the UK affecting non-domiciled persons. It will cover Inheritance Tax and Trusts. For the explanation of the new FIG regime, please see the first part here.
UK Inheritance Tax – current rules:
Domicile also affects inheritance tax on non-UK situ assets. Under the current regime, inheritance tax (IHT) is based on the deceased person’s domicile status. Everyone in the UK pays IHT, but non-doms are again subject to IHT only on their UK situ assets.
UK Inheritance Tax (IHT) – Significant changes!
In its Spring budget the UK government expressed an indication to move IHT to a residence-based system. According to Henleys’ take, individuals become subject to the UK IHT on worldwide assets once they have been UK tax resident for 10 years. Once in the net, individuals remain in the scope of the UK IHT unless they become a non-UK tax resident for a period of 10 years. One then has to be careful to check the residence in and out requirements even after leaving the UK to be certain of the scope of their liabilities.
IHT would be a hotly debated subject so watch this space.
UK offshore trusts – Significant implications
- Changes from April 2025:
- Protections from taxation of income and gains within settlor-interested trust structures will be removed for taxpayers who do not qualify for the new four-year FIG regime.
- Foreign income and gains arising in offshore trust structures that are settlor-interested will be taxed on UK resident settlors on an arising basis unless they qualify for the FIG regime.
- Current Regime:
- UK resident settlors of non-UK resident trusts (which are settlor-interested) can be assessed on income arising within the trust structure under two provisions: the settlements code (specifically for trust-level income) and the Transfer of Assets Abroad code (which applies more broadly, including income from underlying non-UK companies).
- Settlors’ Taxation:
- Non-UK domiciled or deemed domiciled settlors can currently benefit from protections from UK taxation.
- Foreign income and gains within the trust are pooled and only taxed if matched to capital payments received by UK resident beneficiaries.
- Implications:
- The change in legislation is expected to be significant.
- Individuals with assets invested via non-UK trusts should seek advice promptly.
- Beneficiaries’ Tax Position:
- Beneficiaries of offshore trusts that are not settlor-interested will remain consistent with current rules.
- Capital payments to UK resident beneficiaries of non-UK trusts not eligible for the FIG regime will match to relevant income and gains and be taxable at their marginal tax rates.
- Beneficiaries within the FIG regime can receive income distributions and capital payments without triggering a UK tax charge, but capital payments will not match to trust income and gains.
- Modified Onward Gifting Provisions:
- Capital payments to beneficiaries eligible for the FIG regime may be subject to provisions aimed at preventing onward gifts to other UK resident individuals.
Babur Yusupov,
Senior Investment Manager Oracle Capital Group
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