Abolition of non-dom status: A matter of trust

With the Autumn Budget just around the corner, speculation over which taxes may change is hotting up. One area guaranteed to see change is the abolition of non-domiciled status. Plans were already in place to make changes from April 2025, before the general election. Labour have since confirmed their intentions to legislate these changes while announcing amendments to their scope.

One of the major amendments Labour intends to make, included as a manifesto pledge, is to make the tax treatment of offshore trusts established by non-doms significantly less advantageous.

While at the time of writing, some of the media are reporting that Labour could be considering alterations to their current plans in this area, in the absence of a formal statement from Government on the matter, this is currently based on speculation. We look here at what the main impacts and uncertainties are for these structures leading up to the Budget based on the plans set out by the Government to date.

Income tax and capital gains tax (CGT)

Trustees of offshore trusts are not usually exposed to UK income tax and CGT themselves unless they are in receipt of UK income or dispose of UK property-related assets. However various anti-avoidance provisions can result in the income and gains of these trusts being taxable on UK resident settlors or beneficiaries of the trusts. UK domiciled settlors of such trusts who have an interest in the trust pay UK tax on an arising basis on all income and gains of the trust. When the concept of deemed domicile was introduced for income tax and CGT in 2017, trust protections were enacted which effectively shielded a long-term UK resident non-dom settlor from these tax charges if certain conditions were met. Labour’s intention is to remove these protections for the vast majority of settlors, with the implication that this will significantly impact their tax position. Some possible consequences were considered in our prior article, in the case study of Eva.

The Government has also noted they intend “to conduct a review of offshore anti-avoidance legislation, including the Transfer of Assets Abroad and Settlements legislation, to modernise the rules and ensure they are fit for purpose.” This could have further implications for the settlors and beneficiaries of offshore trusts. However, the Government says it does not intend to legislate any changes before April 2026 and hopefully, there will be a thorough consultation before that date. Given that more fundamental change is planned for April 2026, one might question the value of making what will turn out to be short-lived changes from April 2025. This is especially true given the complexity of offshore trust taxation and the recognition by the Government in other areas (see inheritance tax below) that structures have been set up based on existing rules and some transitional reliefs might be appropriate. This point is also made in a recent representation by STEP’s UK Technical Committee, which suggested that all of the trust changes should be pushed back to April 2026. We wait to see whether the Government will alter their announced timelines here, although not with much hope.

Inheritance tax (IHT)

While Labour’s plans on income tax and CGT for trusts were broadly similar to those announced by the prior Conservative Government, their plans for IHT on trusts go much further. The last Government intended to grandfather excluded property status for IHT purposes for assets held in existing trusts, but Labour does not. They have stated that the Government “intends to change the way IHT is charged on non-UK assets which are held in such trusts so that everyone who is in scope of UK IHT pays their taxes here.” While there is much not said in the note from the new Government, the starting point appears to be that assets held in trusts settled by a settlor who is within the scope of UK IHT under the new residence-based regime to be introduced from April 2025 will not be excluded property. However, the note does not deal with more difficult cases, for example, what if the settlor is dead? Does the trust then cease to be relevant property? Is its status based on the settlor’s status at the time of death? Will there be different rules for settlors who died or left the UK before the rules come into force? This has the potential to be very complex. It will be interesting to see how the Government deals with the various iterations of circumstances when they publish the new rules, and their detailed application, as promised on 30 October.

The financial implications of these changes are potentially huge, since where the settlor is alive and has an interest in the trust for reservation of benefit purposes, the trust assets will be exposed to a double layer of IHT charges, being an up to 6% relevant property charge every 10 years as well as a 40% charge on the value of the trust assets at the settlor’s death, as compared to no IHT exposure at present. The Government appears to recognise that this change is being foisted on taxpayers that have structured assets under existing rules, and states that they are “considering how these changes can be introduced in a manner that allows for appropriate adjustment of existing trust arrangements.” So, we can expect to see some transitional reliefs perhaps, but with no indication of what they might be. This might take the form of, for example, an extended period during which settlors can be excluded from trusts without that being treated as the cessation of a reservation of benefit, and/or reliefs or reduced rates of tax for collapsing these structures. It will be interesting to see how generous any transitional arrangements are on the day of the Budget.

How we can help

We are hugely experienced in advising non-doms and overseas trustees on their UK tax affairs. High-quality professional advice will be critical given the complexity of the changes and in navigating the transitional rules expected.  Please do get in touch to discuss how we can help.