In-depth Analysis
In this article, we will focus primarily on the taxation of non-resident trusts (also known as offshore trusts), which-following the extensive reform launched in March 2024 and culminating in the abolition of the so-called resident non-domiciled regime-has become a highly topical issue.
To this end, it is useful first to summarise the taxation of resident trusts, and then examine specific cases which are also relevant to non-resident trusts and therefore require a dedicated analysis.
A general tax principle can be identified which inherently characterises resident trusts: although in the United Kingdom there is no substitution-based taxation system (except for specific cases), the logic behind trust taxation is that trusts themselves are treated as taxable entities and serve the function of “anticipating” the tax liability that could otherwise be attributed, either actually or potentially, to the beneficiaries on the amounts distributed or distributable.
The legislator’s objective is to discourage, from the perspective of direct taxation, the accumulation of income and capital gains in the hands of the trustee-both to make the tax regime as neutral as possible and to encourage the continuous flow of funds between settlor, trustee, and beneficiaries.
As regards indirect taxes, the use of a trust-beyond facilitating the intergenerational transfer of complex estates-allows, through a system of partial taxation spread over time (via periodic charges), to avoid, at the time of the relevant taxable event, an otherwise financially unsustainable outlay (considering that the Inheritance Tax rate is 40%).
In general terms, we set out below some basic and preliminary information:
- A discretionary trust is a taxable entity, subject to Income Tax (IT) at a rate of 45%, while the rate on dividends alone is 39.35%.
- The trust enjoys no exemption, except that the first GBP 500 of net income is exempt.
- Trust management expenses provide a benefit, as they create an amount of income taxable at 20% and dividends at 8.75%.
- In the case of Settlor Interested Trusts (SIT)-that is, trusts where the settlor retains a right to the trust’s income-the tax liability falls on the settlor, but any income taxed at trustee level may be attributed to the settlor with a corresponding tax credit.
- In the case of Interest in Possession Trusts (IIP)-that is, trusts where the beneficiary has the right to receive the trust’s income periodically-the trustee taxes dividends at 8.75% and other income at 20% (the beneficiary must then report these values in their own tax return).
- Finally, in the case of a bare trust (which, under civil law principles, can effectively be treated as a fiduciary mandate), income is attributed transparently to the settlor or beneficiary, depending on the provisions contained in the trust deed.
Residence and Classification
The residence of a trust follows the criteria and rules applicable for determining, for Corporation Tax purposes, the residence of the trustee. The residence of a trustee that is a legal person follows the ordinary rules of tax residence, whereby a company is considered UK resident if the place of incorporation or the place of effective management is in the United Kingdom. However, the provisions contained in the double tax treaties remain applicable.
It should be noted that where there is more than one trustee, the trust is regarded as a single entity for tax purposes, and only one of the trustees would be considered as the tax representative of the trust.
With the exception of cases where a foreign trustee has a permanent establishment in the United Kingdom, a non-resident trust does not produce UK-source income, except in specific circumstances (for example, in the case of certain categories of income-such as real estate income-or where a business activity can be qualified as trade and therefore, regardless of the application of a withholding tax, it must be declared in the United Kingdom).
It may occur that a trust has one resident trustee and another non-resident trustee. Dual-trustee structures have been widely used, especially since, under the previous legislation, if the settlor was not domiciled, the trust was not considered UK tax-resident.
With the changes introduced by the Finance Act 2025, the concept of domicile has been replaced entirely by that of residence, with the consequence that structures with both a resident and a non-resident trustee could now potentially fall within the UK tax net, since domicile is no longer a relevant factor.
It remains confirmed, however, that where there are multiple trustees, and at least one is UK-resident, then-at least from a formal perspective-to avoid the trust being considered resident in the UK, the majority of trustees must be non-resident. This is because if the UK-resident trustee actually exercises independent powers, the place of effective management is assumed not to be located in the UK.
Attention must also be paid to the potential negative consequences of a change in the residence of a trust. If a trust becomes UK-resident (a circumstance which may become increasingly frequent under the new legislation), then a subsequent exit of a trustee (that is a legal person) from the UK could trigger the recognition of latent capital gains on assets held by that trustee.
As regards the classification of trusts, reference must be made to domestic law and case law, according to which offshore (non-resident) trusts can be divided into four main categories based on their peculiar characteristics:
- Discretionary trusts;
- Non-discretionary (Settlor interested trusts);
- Non-discretionary with identified beneficiaries (interest in possession trusts);
- Transparent (bare trusts).
With regard to interest in possession trusts, case law (notably Archer-Shee v Baker (11 TC 749) and Garland v Archer-Shee (15 TC 693)) distinguishes between Baker-type trusts and Garland-type trusts. The former are characterised by the fact that beneficiaries have an immediate and actual right to the income accrued by the trust (regardless of whether it is distributed), net of the pro-rata expenses of the trust. The latter are characterised by beneficiaries having a right to the trust income only after it has been determined by the trustee and the trustee has resolved to allocate such income to the beneficiary (in which case, the income is taxable only once it has actually been received).
From a tax perspective, it is also useful to introduce another distinguishing criterion: whether the settlor retains the right to be treated as a beneficiary, or not. This distinction applies both for Income Tax and Capital Gains Tax purposes, although the specific implications vary depending on the type and features of the trust. The distinction is significant because the first category is subject, among other things, to numerous anti-avoidance provisions, which in practice make the trust’s income taxable in the hands of the settlor.
Settlor Interested Trusts (SITs)
Non-resident trusts, if they do not fall within the scope of section 479 Income Tax (Trading and Other Income) Act 2005 (ITTOIA)-which is addressed separately below (i.e., if they are not classified as discretionary trusts)-are automatically treated as non-discretionary trusts. Within this category, however, two quite distinct situations can be identified:
- Where the settlor retains the right to the income of the trust (and is therefore treated as a beneficiary).
- Where the settlor cannot-either directly or indirectly-be treated as a beneficiary (but the beneficiaries themselves have rights, in different forms, to obtain the benefits of the trust).
In this paragraph, we analyse the first category-Settlor Interested Trusts. According to section 624 ITTOIA, these can be defined as trusts in which the settlor maintains a direct or indirect interest in the assets settled into trust. It is sufficient that the settlor retains only a right to the income produced by such assets. In such cases, income arising from the assets in trust is taxable on the settlor, regardless of whether the settlor actually benefits from it. What matters is the possibility that the settlor may, now or in the future, benefit-directly or indirectly (for example, through children, spouse, or civil partner).
The provision is drafted broadly so as to capture all legal arrangements whose effect is to provide, even potentially, a benefit to the settlor, spouse, partner, or minor children.
Who is considered the “settlor”?
For these purposes, the “settlor” is not necessarily the person formally designated in the trust deed. Rather, it is the person who, directly or indirectly, suffers a reduction of assets in favour of the trust. This may include contributions from companies or partnerships connected to the individual.
Relevant transactions
From an objective perspective, all legal acts capable of producing benefits for certain categories of persons are included. The guiding principle is that where a transaction takes place on arm’s-length terms (as if the parties were independent third parties), it should not fall within section 624 ITTOIA.
Tax consequences
It is crucial to understand that if a trust is classified as an SIT, distributions of income or capital by the trustee are not taxable for the recipient, because the income is already taxed on the settlor. That said, there may be different reporting and computation rules depending on whether the recipient is otherwise a non-taxable person.
Even where section 624 cannot be applied, other anti-avoidance provisions may still apply, notably sections 714–751 ITA 2007 (the “Transfer of Assets Abroad” rules, known as the TOAA code), which are dealt with later.
Reporting obligations
The settlor must report trust income in their tax return (form SA100) in a dedicated section (SA107, “Income chargeable on settlors”). The income must be declared according to its nature (trading or investment income, or as categorised in SA107 as non-savings or savings) and whether it has been subject to the basic rate or the trust rate. The total income is then included in the settlor’s overall income, with credit for any tax already paid.
For resident trusts, this information is usually provided via form R185. For offshore trusts, trustees are not required to use this form, though in practice they often provide equivalent information in time for the settlor’s tax filing.
In calculating the settlor’s taxable income, all payments made by the trust and the trust’s income (even over multiple years) must be considered. As a general rule, distributions are deemed to represent income first, and capital thereafter.
Loans from the trust to the settlor may also be treated as taxable if, and to the extent that, the trust has earned taxable income. This can include income from the previous year, but not beyond 10 years (after which repayment of capital is tax-neutral).
Practical difficulties with offshore trusts
For UK resident trusts, HMRC (and taxpayers) can easily trace the financial flows between trustee, settlor, and beneficiary using form R185. In the case of offshore trusts, however, both theoretical and practical difficulties may arise in identifying the exact amounts and persons involved. Trust deeds, foreign trust law, or local regulations may restrict the sharing of information about trust income and beneficiaries. Foreign trustees may also lack the legal or practical means to provide the necessary details for UK tax purposes.
Interest in Possession Trusts (IIPs)
In addition to Settlor Interested Trusts, there are also non-discretionary trusts where beneficiaries have an immediate right to receive the trust income as it arises. These beneficiaries are known as income beneficiaries. If such a right extends for the beneficiary’s lifetime, the individual is called a life tenant or life interest holder.
These arrangements are known as Interest in Possession Trusts (IIPs).
General functioning
In general, IIPs operate in a manner similar to tax-withholding arrangements. The trustee is taxed on the trust’s income but at a favourable rate, since the trustee is obliged to distribute that income. Ultimately, the beneficiary is the person responsible for the tax liability, receiving credit for the tax already paid by the trustee.
It is important to clarify from the outset that IIPs are not transparent trusts in the fiscal sense. Rather, they benefit from reduced tax rates because they effectively operate as tax substitutes.
Beneficiary rights
Legally, an income beneficiary may also potentially be entitled to the capital of the trust (a capital beneficiary). However, the trustee’s discretionary power to appoint a capital beneficiary does not alter the classification of the trust as an IIP. The defining element is the entitlement to income.
Determination of taxable income
Once it is established that a trust is an IIP, the trustee must calculate taxable income. This is done using the standard rules for determining trust income, similar to those applicable to discretionary trusts.
Special care must be taken where income accumulated within the trust may, in some cases, not qualify as income of the trust itself but rather as capital. This distinction stems from case law. For example, in Trustees of the Mrs PL Travers Will Trust [2013] TC02830, the courts distinguished between values derived from pre-existing assets at the time the trust was created (income) and values derived from subsequent acts (capital).
Thus, income may in some circumstances be taxed at the trust level but considered capital for distribution purposes. This can complicate tax treatment where beneficiaries of income and capital are different.
Tax rates
Trust income is taxed on the trustee according to de minimis rules:
- Dividends (and equivalent income, such as debt forgiveness) are taxed at 75%.
- All other income is taxed at 20%.
Trustees are required to complete form R185 and provide it to beneficiaries.
Expenses
Trust expenses are deducted in a specific order: first against dividends, and then against other income.
Direct income distribution
There are cases where the trustee must immediately transfer income to the beneficiary upon receipt. In Trustees of the Paul Hogarth Life Interest Trust 2008 [2018] TC06757, it was held that in such cases, income is not taxed on the trustee but directly on the beneficiary, provided it is paid directly from the source to the beneficiary.
Taxation of beneficiaries
Beneficiaries of IIPs are taxed broadly in the same way as those of discretionary trusts, with some distinctions:
- The trustee taxes income at 8.75% (dividends) or 20% (other income).
- Trust management expenses are not deductible but, along with taxes already paid, are summarised in form R185.
- Beneficiaries must declare the grossed-up income (gross of taxes paid, net of expenses, which are also grossed-up for consistency).
- The difference is included in the beneficiary’s income. Depending on the individual’s tax band, they may have an additional liability or be entitled to a refund, as they are credited with the tax already “prepaid” by the trustee.
Discretionary Trusts
Discretionary trusts are governed by section 479 of the Income Tax Act 2007 (hence they are often referred to as s. 479 trusts). These provisions also apply, with the necessary adjustments, to offshore trusts.
Mechanism of taxation
The taxation of discretionary trusts occurs in two stages:
- At trustee level – income is taxed on the trustee, who acts in effect as a withholding agent. The maximum tax rates are applied, on the assumption that the ultimate beneficiary will fall into the highest tax bracket.
- At beneficiary level – when income is distributed, beneficiaries are taxed according to their own marginal tax rates. This may result in additional tax due or, conversely, in a refund (depending on the individual’s position).
For non-resident trusts, foreign-source income is not subject to UK taxation, except where the trust has a permanent establishment in the UK or earns UK-source income.
However, if UK-source income exists, the non-resident trust-or more precisely, the UK-resident trustee (if there are several) or one of the non-resident trustees-acquires tax liability. In this case, the trust is treated as an internal discretionary trust, taxed at 39.35% on dividends and 45% on other income.
UK-source income is taxable even where the trust beneficiaries are non-residents (section 811 ITA 2007). Certain categories, such as interest on specific securities (FOTRA securities), are exempt since they are considered entirely offshore in nature and paid gross without withholding.
If a trust has no UK beneficiaries, the only UK tax exposure would generally be on UK-source income, and even then, only to the extent required by law through withholding.
Trustee-level taxation
Trusts with income below GBP 500 per fiscal year are exempt from tax, though exceeding this threshold does not trigger an allowance but full taxation. If a settlor has created multiple discretionary trusts, the GBP 500 limit is split among them, with a minimum of GBP 100 per trust.
Taxes paid by trustees are accumulated in a “tax pool”, updated annually. This pool is critical because it determines the tax credit available to beneficiaries when they receive distributions. The pool reflects:
- (a) Taxes paid in prior years;
- (b) Taxes paid in the current year;
- (c) Reductions representing income advances to beneficiaries during the year.
Deductibility of trust expenses
Expenses are governed by section 486 ITA 2007 and relevant case law (e.g., HMRC v Trustees of the Peter Clay Discretionary Trust [2002] 79 TC 473). Some principles include:
- Expenses attributable solely to a particular category of income are deductible against that income (e.g., property management fees against rental income).
- Trust management expenses (TME)-those incurred to preserve trust income and distribute it to beneficiaries-are deductible, but only to the extent they benefit income beneficiaries.
- Where there is conflict between the trust deed and tax law, tax law prevails.
- Expenses that cannot reasonably be apportioned to income are not deductible, unless they can be split with certainty (e.g., professional fees based on hours attributable to income vs. capital work).
- Distributions to beneficiaries (even if they appear as expenses, such as utility payments) are never deductible.
- For foreign income not subject to UK tax, deductible expenses are proportionally reduced.
It is important to note that in discretionary trusts, TMEs are not deductible in the ordinary sense. Instead, they create a tax benefit: they are grossed up at the basic dividend rate (8.75%), deducted from taxable income, and then re-taxed at the same rate. In effect, this produces relief rather than a deduction.
Beneficiary-level taxation
Beneficiaries of discretionary trusts are taxed on trust income they receive, according to their own marginal rates. Importantly, income received from a discretionary trust is treated as a separate category of income and not merged with its underlying source.
Trustees may distribute both income and capital, and distinguishing between the two can be complex. The trustee has the responsibility to classify distributions as income or capital and to allocate the corresponding tax credit from the pool.
If a trustee inadvertently distributes more income than the available pool credit, they must top up the pool (and pay additional tax, possibly with penalties and interest). Thus, the trustee bears significant fiscal responsibility for proper classification.
Beneficiaries declare income distributions on their tax return, grossed up by 55%, and then apply their own marginal rates. If their rate is below 45%, they may obtain a tax credit or refund.
Where income is foreign-sourced and has already been taxed abroad, the trustee notes this in form R185, allowing the beneficiary to claim foreign tax credit relief.
It should be noted that taxation may also arise where trust income is applied to expenses benefiting a beneficiary or their connected persons.
Practical considerations
Because tax credits in the pool expire after six years if unused, trustees often distribute income regularly to ensure beneficiaries can recover tax already paid and avoid the credits being lost. This is particularly important for beneficiaries in the top tax bracket, who can reclaim the full 45% pre-paid by the trustee.
Tax Filing Obligations of Non-Resident Trusts
Except where a permanent establishment exists in the UK, a non-resident trust is not a taxable entity, other than on UK-source income and/or where it is engaged in a trade carried out in the UK.
UK-source income
Within this category fall financial income considered to be of UK origin, with some exceptions:
- Exempt income – Interest from certain categories of securities (e.g., “free of tax to residents abroad” (FOTRA) securities under section 714 ITTOIA 2005) and interest generally, provided all beneficiaries of the trust are non-resident.
- Excluded dividends – Dividends received by non-residents are excluded from UK tax regardless of the recipient’s status or residence.
- Capital gains – Gains from the disposal of movable assets are also exempt.
As a result, the categories of income actually taxable in the UK at the trust level are fairly limited. They include:
- Royalties for services performed in the UK.
- Rents from UK immovable property.
- Capital gains on disposals of property-holding companies.
In such cases, the trustee (or one of them) must file a UK tax return, usually by appointing a fiscal representative.
Interest in Possession Trusts
For non-resident IIPs, the rules are essentially the same as those for discretionary trusts, with some specific differences.
Taxation of UK-Resident Beneficiaries of Offshore Trusts
UK-resident beneficiaries of offshore trusts may be taxed on distributions (or amounts treated as available for distribution). The applicable tax regime depends on the nature of the sums received, which fall into three categories:
- Capital
- Capital gains
- Income
Capital distributions
Capital distributions are tax-neutral for the recipient. These consist of original assets settled into the trust or assets later disposed of without generating income or capital gains in the meantime.
Capital gains
Where the trust realises a capital gain, section 87 of the Taxation of Chargeable Gains Act 1992 (TCGA 1992) applies. This provides:
- If the settlor (or their spouse, children, grandchildren, or controlled companies) can directly or indirectly benefit, the gain is attributed to the settlor (settlor charge).
- In all other cases, the gain is attributed to the beneficiary (beneficiary charge), but only insofar as it is distributed or enjoyed.
The settlor charge means that the settlor must include in their tax return the gain realised by the trustee, whether or not they actually received a benefit.
The beneficiary charge applies only where the gain is matched with a distribution, based on a first in, first out allocation method.
Previously, offshore trusts were often used by non-domiciled residents and thus largely avoided these rules. With the abolition of the domicile concept, all offshore trusts now fall within section 87 TCGA.
This change has significant implications, creating obligations to track and report gains, which may be difficult in practice. For instance, settlors may not even be aware that a foreign trust has realised a gain, yet still be personally liable for UK tax.
If the settlor charge applies, subsequent distributions of that gain to the settlor or beneficiaries are tax-neutral (since the gain has already been taxed). Gains realised before April 2025 (the reform date) are generally treated as already acquired and distributions of them are capital-neutral.
Tax rates are the same as ordinary CGT (20% or 28% depending on asset type), with annual exemptions and allowance for offsetting capital losses.
If a distribution occurs more than a year after the gain was realised, section 91 TCGA 1992 imposes an increased tax charge. This adds 10% of the tax due for each year’s delay (up to six years).
Income
For income, the legislative approach differs. Income distributed from a discretionary trust is treated as untaxed foreign income in its own right, regardless of its source.
The beneficiary must report it in the foreign income pages of their tax return and pay Income Tax at their marginal rates.
Beneficiaries may, however, claim relief for tax already paid by the trust, directly or indirectly, on the income distributed. This is done via Extra-Statutory Concession B18 (ESC B18). Relief must be claimed within 5 years and 10 months of the distribution becoming taxable, and HMRC recalculates the individual’s total tax position accordingly.
Taxation of Non-Resident Beneficiaries of UK-Resident Trusts
Non-resident beneficiaries of UK-resident (onshore) trusts must file a UK tax return for trust income that accrues to them (not just amounts actually paid). They must follow the rules set out in form SA107 and its accompanying notes.
Discretionary and IIP trusts
In the case of discretionary trusts and interest in possession (IIP) trusts, non-resident beneficiaries may claim a refund of the taxes shown on form R185, even potentially a full refund.
Where distributions are made by discretionary trusts, the income identified through R185 is considered to be of UK source and taxed according to the general rules for non-residents. Thus, the beneficiary must declare this income in their UK return, where it contributes to their total taxable income.
However, if the beneficiary has no other UK income apart from the trust distributions, they may consistently be in a repayment position, with the right to reclaim (partially or fully) the taxes “prepaid” by the trustee under ITA 2007, s. 56(3).
Special reliefs
Other provisions may apply to neutralise the UK tax burden on non-residents. A key example is Extra-Statutory Concession B18 (ESC B18), which allows certain categories of income to be treated as if the trust were transparent. This enables beneficiaries to access reliefs available under double taxation treaties directly, instead of relying on the trustee.
Anti-Avoidance Provisions and Attribution of Income and Gains
Earlier, we examined taxation of trusts where the settlor benefits from the income. There is, however, a further body of anti-avoidance legislation known as the Transfer of Assets Abroad rules (TOAA).
General framework
Under TOAA, income arising to a non-resident person (individual or entity) can be attributed for UK tax purposes to a UK-resident individual where:
- The income originates from a transfer of assets abroad made by the UK resident (the transferor).
- The UK resident has, directly or indirectly, the power to benefit from that income.
These rules were first introduced in 1936 but historically had limited impact, since most potentially affected individuals were non-domiciled residents using the remittance basis. With the abolition of the non-dom regime, TOAA is now far more relevant.
Key provisions
- Section 720 ITA 2007 – attributes income to individuals who have the power to benefit from income arising abroad.
- Section 727 ITA 2007 – applies where an individual receives capital payments linked to a transfer of assets abroad.
The definition of transferor has been expanded significantly since 2007. It now includes not only the original person and their spouse, but also other UK-resident individuals who may benefit from the transfer (known as the benefits charge).
From April 2012, amendments were introduced to bring TOAA in line with EU principles of free movement. Transfers made on genuine commercial terms at arm’s-length values are excluded. Though the UK has since left the EU, this exemption is still considered to apply, since it reflects fundamental principles of UK tax law.
Examples of application
TOAA can apply in a variety of circumstances, such as:
- Where the transferor retains the ability to benefit from income, even without an immediate increase in wealth.
- Where the transferor receives a capital sum while the non-resident entity generates income (e.g., loans).
- Where connected persons enjoy a benefit, such as rent-free use of property abroad funded by transferred assets.
Case law (e.g., Fisher [2021] EWCA Civ 1438; Rialas [2020] UKUT 367) has shown that the definition of transferor can extend to groups of individuals, where a transfer is part of a broader plan-even unintentionally-that provides benefits to them.
Trusts and TOAA
In the context of trusts, TOAA provisions allow the attribution of trust income to UK residents based purely on subjective criteria (the ability to benefit). However, undistributed profits of companies owned by a trust cannot generally be attributed under TOAA until they are distributed.
Exemptions
There are two main exemptions:
- Motive/purpose test – where the transfer was not made for the purpose of avoiding UK tax and was instead a genuine commercial transaction.
- EU exemption – based on prior EU law protections, still applied in principle to maintain fairness in the UK system.
Inheritance Tax (IHT)
Inheritance Tax in the UK applies to trusts as well as to individuals. The general rate is 40% and is levied on the capital value of transfers. The relevant provisions are contained in the Inheritance Tax Act 1984 (IHTA 1984).
General framework
Trusts are treated as separate taxable persons for IHT purposes. Transfers into and out of trusts, as well as the property held within them, may trigger IHT charges.
The key principle is that where assets are settled into a trust, they are generally treated as a chargeable transfer, unless they qualify as a Potentially Exempt Transfer (PET) or are otherwise exempt.
Main taxable events
The IHT regime for trusts is often called the “relevant property regime”, which applies to discretionary trusts and most IIPs. Under this regime, tax charges can arise on three occasions:
- Entry charge – When assets are transferred into the trust.
- The transfer is a chargeable lifetime transfer (CLT).
- The rate is 20% on the excess above the nil-rate band (currently GBP 325,000), payable immediately.
- If the settlor dies within 7 years, the tax is recalculated at 40%, with credit for the tax already paid.
- Ten-year (periodic) charge – Every 10 years, the trust is subject to a charge on the value of its assets.
- The maximum rate is 6%.
- The effective rate depends on the value of assets and any available nil-rate bands.
- This mechanism spreads IHT over time, rather than imposing a lump sum on transfer.
- Exit charge – When property leaves the trust (i.e., is distributed to beneficiaries).
- The rate depends on the time since the last periodic charge and the effective rate applied at that date.
- In practice, exit charges are often modest if distributions are made soon after a ten-year charge.
Types of trusts and exceptions
Some categories of trust do not fall within the relevant property regime:
- Bare trusts – Assets are treated as belonging directly to the beneficiary, so IHT applies to them personally.
- Settlor-Interested Trusts for disabled persons – Favourable rules apply where the trust is created for a disabled person.
- Interest in Possession Trusts created before March 2006 – These may benefit from grandfathering, where the life tenant is treated as owning the assets directly for IHT purposes.
Practical effect
In practice, the relevant property regime was designed to prevent the use of trusts as a means of escaping IHT permanently. The 20% entry charge and the periodic 6% charge ensure that trusts face a tax burden similar in effect to outright transfers.
Still, trusts remain useful planning tools, particularly where the settlor wishes to:
- Protect family assets from fragmentation.
- Provide for minors or vulnerable persons.
- Manage succession over multiple generations.
Concluding Remarks
The Finance Act 2025 has fundamentally changed the taxation of trusts in the United Kingdom. With the abolition of the non-domicile (res non dom) regime, the concept of residence has replaced that of domicile as the decisive factor in determining whether and how trusts are taxed.
This reform has several important consequences:
- Increased scope of UK taxation – Many offshore trusts that were previously outside the reach of UK tax rules now fall within them. Both settlors and beneficiaries must carefully assess their potential liabilities.
- Settlor charge extended – Where settlors can benefit, even indirectly, they may find themselves taxed on income or gains realised by trusts, regardless of whether they actually receive any benefit.
- Beneficiary charge tightened – Beneficiaries who receive distributions from offshore trusts are more likely to be taxed, since matching rules now capture a broader range of income and capital gains.
- Greater relevance of anti-avoidance rules – The Transfer of Assets Abroad (TOAA) provisions, which were previously less significant for non-doms, are now highly relevant and may attribute trust income to UK residents simply because of the possibility of benefit.
From a policy perspective, the UK legislator has sought to make the system more neutral, discouraging the indefinite accumulation of wealth offshore and ensuring that income and gains are taxed in line with the ultimate enjoyment of those resources.
For practitioners and taxpayers, the reforms mean that:
- Structures that were once sustainable may now expose clients to unexpected UK tax liabilities.
- Trustees must exercise far greater care in providing tax reporting information, particularly for UK resident settlors and beneficiaries.
- Close monitoring of trust residence, distributions, and capital gains is essential to avoid unexpected charges.
While trusts continue to play a useful role in asset protection and succession planning, they have undoubtedly become less attractive as a tax planning vehicle in the post-2025 landscape.
The United Kingdom has thus moved towards a model in which taxation is increasingly based on residence and effective benefit, leaving far fewer opportunities for exemption through formal distinctions.
by Gabriele Schiavone, Matteo Colafrancesco and Victoria Rowlands
Translator’s Note: This is a free English translation prepared by Sheershak Dhakal of SGS & Partners, based on the original article published in Fiscalità & Commercio Internazionale, No. 8–9/2025 (IPSOA), by Gabriele Schiavone, Matteo Colafrancesco and Victoria Rowlands. While every effort has been made to ensure accuracy, this translation is provided for informational purposes only and should not be regarded as a substitute for the original text or as professional legal or tax advice.
