The dust has now settled on the most talked about budget since…well…actually probably just since the ‘mini-budget’ of September 2022. However, it has still generated some ‘healthy debate’ if social media is anything to go by. Initial worries within financial markets appeared to have eased somewhat and it looks likely that this Chancellor and Prime Minister may survive longer than Kwasi Kwarteng and Liz Truss.
With tax increases expected to raise £40bn, there is plenty in Chancellor Rachel Reeves’ budget to talk about but, from the perspective of an Isle of Man Trust Service Provider, it is the abolishment of the non-dom regime and the related changes to trust taxation which stand out.
While this was not unexpected, and indeed much of it had been announced by the Conservatives in the Spring, many non-doms will be reviewing their tax status before April.
Based on the information available so far, the changes to taxation of trusts, established by non-domiciled but long-term UK residents, can be broadly summarised as follows:
Protected Trusts
Currently, UK resident non-domiciled individuals can opt to be taxed on the remittance basis, meaning that they only pay tax on Foreign Income and Gains (FIG) when these are remitted to the UK. From April 2025, this domicile-based treatment will be replaced by a residence-based system whereby relief from UK tax on FIG will only be available for the first four tax years after an individual arrives in the UK, provided they have not been UK tax resident in the ten tax years immediately prior to their arrival (4-year FIG regime).
Non-resident settlor-interested trusts that were settled by non-domiciled individuals currently enjoy protection from tax on FIG. However, from April 2025, this protection will no longer be available for non-domiciled and deemed domiciled settlors who do not qualify for the 4-year FIG regime.
Excluded Property Trusts
From April 2025, the concept of domicile is to be replaced by a residence-based system. An individual will be considered to be Long-Term Resident (“LTR”) when they have been resident in the UK for at least 10 out of the last 20 tax years. The time the individual remains in scope after leaving the UK will be shortened where they have only been resident in the UK for between 10 and 19 years.
When an individual is LTR then their worldwide assets will be potentially subject to Inheritance Tax. The residence status of an individual will also impact the tax position of any trusts that they may have settled.
Currently, where a trust holds non-UK assets and the trust was established by a non-domiciled settlor, the property is considered to be ‘excluded property’ for the purposes of Inheritance Tax. The status of this property is fixed at the time that assets are settled into the trust, meaning that should a settlor have subsequently become UK domiciled or deemed domiciled, the IHT position of the assets in trust did not change.
From April 2025, these non-UK assets will only be considered to be excluded property at times when the settlor is not a long-term resident. When a settlor is long-term resident, any assets that they have settled (even when not long-term resident) will be subject to IHT on certain trigger events like the ten-year anniversary of the trust or when assets exit the trust.
There may also be an exit charge when a settlor’s status changes, and they move overseas for long enough to become non-LTR.
With changes largely being effective from April 2025, and some transitional rules in place, now is the time for settlors, beneficiaries and trustees to start reviewing structures to ensure that they are aware of the tax implications.