Taxing foreign trusts under new UK domicile rules

The April 2025 changes to UK domicile rules have significantly altered the tax treatment of foreign trusts established by previously non-UK domiciled individuals (“non-doms”), impacting income tax and inheritance tax regulations.

Before discussing the tax treatment, it’s crucial to understand two fundamental concepts:

1. Residence

This is determined using the Statutory Residence Test. A person is a UK resident if they meet specific day-count or connection-based criteria.

2. Domicile

This refers to a person’s permanent home. Until April 2025, non-doms had special tax privileges, particularly around foreign income and gains.

Here’s a detailed breakdown of what has changed and how these trusts are now taxed post-April 2025:

What was the pre-April 2025 position?

Before 6 April 2025, non-doms enjoyed favourable treatment regarding foreign income and trusts, including:

Trust protections for non-doms

If a non-dom established a non-UK resident trust before becoming deemed UK-domiciled (after 15 years of UK residence), the trust was “protected”.

Protected trusts enjoyed exemptions from UK tax on foreign income and gains, as long as the settlor did not add assets after becoming deemed domiciled, no UK property was added to the trust and the trust was genuinely offshore and not tainted by UK connections.

Settlors and beneficiaries could avoid UK tax on trust income and gains if these remained offshore and were not remitted to the UK.

Domicile-based inheritance tax rules

The UK’s inheritance tax (IHT) framework for non-doms and their trusts is undergoing significant changes effective from 6 April 2025. These reforms shift the basis of IHT from domicile to tax residence, impacting how non-UK trusts are taxed.

Currently, non-UK assets settled into an excluded property trust (EPT) by non-doms are considered “excluded property” and are outside the scope of UK IHT, regardless of the settlor’s future residence status.

Individuals become deemed UK domiciled for IHT after residing in the UK for 15 of the previous 20 tax years. However, assets settled into an EPT before acquiring deemed domicile status remain excluded from IHT.

What changed in April 2025?

The abolition of the non-dom regime from 6 April 2025 has fundamentally changed the tax landscape for foreign trusts created by non-doms.

Income tax changes

From 6 April 2025, all foreign trusts created by UK tax residents, even if previously non-domiciled, lose their protected status.

As a result, foreign income and gains in these trusts are now taxed on the UK resident settlor as they arise, unless they can demonstrate they are no longer UK resident. Even if the income or gains are not distributed, the settlor may be taxed on them annually.

The UK’s transfer of assets abroad (ToAA) provisions are anti-avoidance rules which may also apply if a UK resident has established or benefits from an offshore trust. If the trust routes income or gains through offshore structures, HMRC may seek to tax the UK resident under these provisions.

Inheritance tax changes

From 6 April 2025, the IHT regime will be based on tax residence:

• Long-term UK resident (LTR): An individual is considered an LTR if they have been UK tax resident for at least 10 of the previous 20 tax years. Once classified as an LTR, their worldwide assets, including those in trusts, become subject to UK IHT
• Trust assets: Non-UK assets in trusts established by an LTR settlor will be within the scope of UK IHT. This includes potential charges on the settlor’s death if they are a beneficiary of the trust
• Exit charges: If a settlor ceases to be a LTR and non-UK assets in a trust become excluded property, an IHT exit charge may apply. This charge is capped at 6% and is proportionally reduced based on the time until the next 10-year anniversary of the trust and the period the assets qualified as excluded property
• Non-UK assets settled into trusts before 30 October 2024 will not be subject to the “gift with reservation” rules, meaning no 40% IHT charge on the settlor’s death if they are an LTR. However, these trusts will still be subject to relevant property charges of up to 6%.

Those who previously relied on trust protections and the remittance basis should review existing trust arrangements to assess the impact of the new rules and consider potential restructuring.

As of April 2025, the UK tax regime has shifted decisively toward a residence-based system, bringing a significant increase in exposure for individuals with overseas income and assets.

Former non-doms can no longer shield foreign earnings using the remittance basis or offshore trusts. Meanwhile, non-residents still benefit from exemption on foreign income and gains but must remain alert to the UK-source rules and temporary non-residence traps.

Navigating these rules effectively demands careful planning, accurate residence tracking and professional advice – especially in a world of increasing transparency and global cooperation between tax authorities.