Excluded Property Trusts After the 2025 Residence-Based Reforms

An excluded property trust is a settlement that holds property which is outside the scope of UK inheritance tax. 'Excluded property' is a defined category in the Inheritance Tax Act 1984. The most important type for internationally mobile clients is non-UK situated property (foreign assets) settled into trust by a qualifying settlor.

When property is excluded property, it sits outside the relevant property regime that normally applies to discretionary and most lifetime trusts. That regime imposes an entry charge on chargeable lifetime transfers into trust above the nil-rate band (20%, half the death rate), a principal (10-year anniversary) charge of up to 6% of the value, and proportionate exit charges of up to 6% when capital leaves the trust. Excluded property escapes all of these, which is why offshore trusts have long been a cornerstone of planning for globally mobile families.

The trust structure typically holds assets such as foreign bank accounts, non-UK company shares, overseas real estate or portfolio investments held through a non-UK company. UK situated assets held in the trust, such as UK land or UK company shares, are never excluded property and remain fully within IHT, so the composition of the trust matters as much as the settlor's status.

• Excluded property is outside the scope of IHT, so no entry, 10-year or exit charges apply to it.
• For foreign settled property, the key question is the settlor's connection to the UK at the relevant time.
• UK situated assets in the trust are not excluded property, regardless of the settlor's status.

Until 5 April 2025, whether foreign settled property was excluded property depended on the settlor's domicile when the property was settled. If the settlor was neither domiciled nor deemed domiciled in the UK at the time the assets went into the trust, the foreign property was excluded property, and it generally stayed excluded property permanently, even if the settlor later became UK domiciled or deemed domiciled.

This 'once excluded, always excluded' feature made offshore trusts extremely durable. A non-domiciled individual arriving in the UK could settle their foreign wealth into an excluded property trust before acquiring deemed domicile (which broadly arose after 15 of 20 years of UK residence under the old rules) and shelter it from IHT indefinitely. Deemed domicile, the remittance basis and this trust protection were closely linked features of the old non-dom system.

From 6 April 2025, the government abolished the concept of domicile as a connecting factor for UK tax. The remittance basis was replaced by the 4-year foreign income and gains (FIG) regime for new arrivals, and the IHT rules moved to a residence basis. Domicile still matters in a few limited situations, but for most excluded property questions the relevant test is now residence.

From 6 April 2025, whether foreign settled property is excluded property depends on whether the settlor is a long-term UK resident at the relevant time, not on their domicile. HMRC's Inheritance Tax Manual (chapter IHTM47) sets out the detail. For chargeable events on or after 6 April 2025 with a living settlor, foreign settled property is excluded property if the settlor was not a long-term UK resident at the date of the event.

The crucial change is that excluded property status is no longer locked in at the point the trust was funded. It can switch on and off as the settlor's residence position moves. If the settlor is, or becomes, a long-term UK resident, the foreign assets in the trust are pulled into the relevant property regime and become exposed to 10-year anniversary charges (up to 6%) and proportionate exit charges. If the settlor later ceases to be a long-term UK resident, the assets can become excluded property again, and an exit charge can arise at that point as the property leaves the relevant property regime.

For qualifying interest in possession trusts, HMRC guidance indicates that on or after 6 April 2025 with a living settlor, foreign settled property is excluded property where both the settlor and the person with the qualifying interest in possession are not long-term UK residents. This is a significant tightening for settlors who spend a long period in the UK.

• The test is applied at the 'relevant time' (for example a 10-year anniversary, an exit, or death), not just when the trust was created.
• A trust can move in and out of the relevant property regime as the settlor's long-term resident status changes.
• Charges can arise both when property enters the regime and, as an exit charge, when it leaves.

Existing trusts are not simply grandfathered. Whether foreign property in a pre-existing trust is excluded property for events on or after 6 April 2025 is judged by the new long-term residence test applied to the settlor. So a trust settled years ago by someone who is now a long-term UK resident can find its foreign assets brought within the relevant property regime from 6 April 2025 onwards.

There is transitional protection, but it is targeted rather than comprehensive. Where property was excluded property comprised in a settlement immediately before 30 October 2024, HMRC guidance (IHTM47022) indicates that it retains protection against the gift with reservation of benefit rules and, where relevant, will not be charged when a qualifying interest in possession ends or on the beneficiary's death. In addition, relevant property charges on this specified excluded property are capped at £5 million per 10-year cycle under a new section 75B of the Inheritance Tax Act 1984. The precise mechanics should still be checked against HMRC guidance for a given trust.

Critically, this transitional protection applies only to property that was already in the trust and excluded before 30 October 2024. Additions to existing settlements, and new settlements, made on or after 30 October 2024 cannot benefit from the transitional protection. New property is excluded property, or not, purely according to the new long-term residence tests. This makes the timing of any funding decisions important, and it means topping up an old trust can bring the new property under the current rules even where the historic assets remain protected.

• Property excluded before 30 October 2024 keeps limited transitional protection (gift with reservation and qualifying interest in possession points, plus a £5 million charges cap per 10-year cycle).
• Additions and new trusts from 30 October 2024 onward follow the new residence tests with no transitional protection.
• Trustees should review each trust's funding history and the settlor's residence timeline before any 10-year anniversary.

A long-term UK resident is, broadly, an individual who has been UK resident for at least 10 of the 20 tax years immediately before the tax year in which the chargeable event (including death) arises. Residence is determined under the Statutory Residence Test. Once someone meets the 10-of-20 test, their worldwide assets, and foreign property they have settled into trust, are within the scope of UK IHT.

Long-term resident status does not end the moment someone leaves the UK. There is a 'tail' during which the status persists. For those resident for 13 tax years or fewer, the tail is a minimum of 3 tax years after departure. It then increases by one tax year for each additional year of residence, up to a maximum of 10 tax years for those with 20 years of residence. Individuals who were deemed domiciled under the old rules broadly retain long-term resident status for a period of non-residence under the transitional rules (to confirm for a specific case). This tail means foreign assets and trust property do not fall out of charge immediately on emigration.

The status can also reset. HMRC guidance indicates that an individual is not treated as long-term UK resident in the year following 10 consecutive tax years of non-residence, even if they later return, so the 10-of-20 clock effectively starts again. For settlors planning around trust structures, mapping the residence timeline precisely, including the tail and any reset, is essential.

• Long-term UK resident: broadly UK resident in 10 of the last 20 tax years.
• Tail on leaving the UK: from 3 tax years (13 years of residence or fewer) up to 10 tax years (20 years of residence).
• Non-residence for 10 consecutive tax years resets the position, so the timeline needs to be tracked carefully.

The reforms change the calculus, but excluded property trusts still have a role for genuinely internationally mobile individuals. The planning is more dynamic because status can change. Common considerations now include the following.

• Timing of settlement: settling foreign assets while not a long-term UK resident (for example, during an early period of UK residence before the 10-of-20 threshold is met) can secure excluded property status, but the assets can be drawn back in if the settlor becomes long-term resident, so the tail and future plans must be modelled.
• New arrivers and the FIG regime: individuals in their first four years of UK residence under the FIG regime are, by definition, not yet long-term residents, which can be a window for structuring, but IHT and income tax rules must be considered together, not in isolation.
• Reviewing existing trusts before a 10-year anniversary: trustees should value the trust, confirm which assets carry transitional protection, and check the settlor's residence status ahead of each anniversary to anticipate any 10-year or exit charge.
• Avoiding inadvertent additions: adding assets to an old excluded property trust on or after 30 October 2024 forfeits transitional protection for that property, so top-ups should be a deliberate, advised decision.
• Departure planning: for settlors leaving the UK, the length of the tail determines when foreign trust property becomes excluded property again and when an exit charge may crystallise, so the exit should be planned around the residence tail.

This should be read alongside our related guides on residence-based IHT, offshore trusts and UK tax, trusts and inheritance tax, and non-resident trusts with UK beneficiaries. It also sits within wider IHT changes. The nil-rate band (£325,000), the residence nil-rate band (£175,000) and the £2 million residence nil-rate band taper threshold are frozen until 5 April 2031, with the taper removing £1 of the residence band for every £2 by which the estate exceeds £2 million. From 6 April 2026, business and agricultural relief are reformed so that 100% relief is capped at £2.5 million combined per person, with 50% relief above that figure, and business relief on shares 'not listed' on a recognised stock exchange (such as AIM shares) falls to 50% in all circumstances. From 6 April 2027, most unused pension funds and death benefits are brought within the estate for IHT. The headline IHT rate remains 40%, reduced to 36% where at least 10% of the net estate passes to charity.

Common questions on how the residence-based rules affect offshore trusts.