Offshore Trusts and UK Tax After the 2025 Non-Dom Reforms

The short answer: the 6 April 2025 reforms abolished the domicile-based rules that made offshore trusts a powerful shelter, and replaced them with a residence-based system. Two protections disappeared at once. First, the income tax and capital gains tax "protected settlement" regime that kept foreign income and gains out of a UK-resident settlor's hands until money was actually paid out. Second, the domicile-based "excluded property" test that kept non-UK trust assets outside inheritance tax.

These were the two pillars that made an offshore trust attractive to a non-domiciled UK resident. Removing them means many trusts that were fully compliant and tax-efficient on 5 April 2025 became exposed to UK tax on 6 April 2025, without the trustees taking any action at all. The trigger is the settlor's residence position, not the trust's location or the historic domicile of the person who created it.

The reforms did not repeal the anti-avoidance machinery that attributes trust income and gains to UK-resident settlors and beneficiaries. Instead, they removed the exemptions that used to switch that machinery off. So the settlements code for income, the transfer of assets abroad rules, and the settlor charge for gains now bite in far more cases than before. For any family with a non-resident trust and a UK-resident settlor, a review is no longer optional.

From 6 April 2025, the protection from tax on foreign income and gains arising within settlor-interested trust structures is no longer available for individuals who do not qualify for the 4-year foreign income and gains (FIG) regime. HMRC's own guidance on the reforms states this directly. In practice this ends what advisers called "protected settlement" or "protected trust" status.

Before the change, a non-domiciled settlor could put foreign assets into a non-resident trust and, provided the trust stayed "protected" (broadly, no tainting additions were made), foreign income and gains rolled up inside the trust free of UK tax until a benefit was matched to a UK-resident beneficiary. That deferral was the central benefit. It has now gone for settlors who are outside the FIG window.

Two nuances matter. First, protection is not lost for everyone: a settlor who does qualify for the FIG regime (a recent arrival, see below) can still shelter qualifying foreign trust income and gains during their 4-year window. Second, foreign income and gains that arose inside a protected trust before 6 April 2025 are generally not taxed simply because the rules changed. That historic protected income remains outside charge unless and until it is matched with a benefit provided to a UK resident after 5 April 2025, at which point the usual matching rules apply.

For a UK-resident settlor who is not FIG-eligible, the default position from 6 April 2025 is arising-basis taxation on the trust's worldwide income and gains, whether or not any distribution is made. This is a decisive shift from the old benefit-matched approach.

On the income side, where the trust is settlor-interested the primary charge is the settlements code. Under section 624 of the Income Tax (Trading and Other Income) Act 2005, a UK-resident settlor who retains an interest in the settlement is taxed on all income arising under it as it arises, including foreign income. The transfer of assets abroad rules operate alongside this and can assess trust or underlying-company income on a UK-resident settlor who has power to enjoy it, particularly where the settlements code does not reach the income. On the gains side, the settlor charge in section 86 of the Taxation of Chargeable Gains Act 1992 attributes the non-resident trust's chargeable gains to a UK-resident settlor who has an interest in the settlement, as the gains accrue at trust level. The effect is that the settlor can face a UK tax bill on income and gains they have never personally received.

• Where the trust is settlor-interested, trust income is taxed on the settlor as it arises under section 624 ITTOIA 2005, not deferred to distribution.
• The transfer of assets abroad code can charge trust or underlying-entity income on the settlor where the settlements code does not apply.
• Trust gains can be attributed to the settlor under section 86 TCGA 1992 as they accrue to the trustees.
• Residential property gains are charged at 24% (18% within the basic-rate band), and non-resident CGT on UK land must be reported and paid within 60 days of completion.
• Where the settlor is not taxable (for example because they are FIG-eligible or non-resident), gains and income can still reach UK-resident beneficiaries through the benefit and capital-payment matching rules.

A FIG-eligible settlor is treated differently: relief can apply to qualifying foreign trust gains and income during the 4-year window. But a gain is only a qualifying foreign asset gain where the asset is situated outside the UK and does not derive 75% or more of its value from UK land, so UK-land-rich structures are excluded from relief even during the FIG period.

The biggest structural change is that inheritance tax on trusts no longer turns on domicile. From 6 April 2025, non-UK settled property is only "excluded property" (and so outside UK IHT) at times when the settlor is not a long-term UK resident. Once the settlor becomes a long-term UK resident, the trust's non-UK assets are brought within the scope of UK inheritance tax.

The long-term UK residence test is whether the individual has been UK resident for at least 10 out of the 20 tax years immediately before the year in which the chargeable event arises. For a living settlor, the trust's IHT exposure is tested against the settlor's status at the time of each charge. For a settlor who dies on or after 6 April 2025, it depends on whether they were long-term resident immediately before death. Where a settlor died before 6 April 2025, the old domicile test at the time the property entered the settlement continues to apply.

There is also an exit tail. Someone who becomes non-UK resident after being long-term resident does not immediately fall out of scope. Depending on how long they were resident, they remain within the net for a minimum of 3 and a maximum of 10 years. So leaving the UK does not switch off trust IHT exposure overnight.

The practical consequence is that an offshore trust with a long-term-resident settlor can fall into the relevant property regime. That means potential 10-year anniversary (periodic) charges and exit charges on the non-UK assets, which historically would never have applied to a genuinely excluded-property trust. There are transitional protections for property that was excluded property in a settlement immediately before 30 October 2024, and a cap of £5m per trust for each ten-year cycle can apply to certain pre-existing arrangements, but these are narrow and should be checked against the specific facts.

Two transitional regimes soften the change, and both interact with trusts. The 4-year FIG regime gives 100% relief on foreign income and gains for new or returning arrivals in their first 4 years of UK tax residence, provided they were not UK resident in any of the 10 consecutive tax years before arrival. For a settlor within this window, qualifying foreign trust income and gains can still be sheltered, which is why the FIG status of the settlor is the first thing to establish.

The Temporary Repatriation Facility (TRF) addresses the legacy: foreign income and gains that arose before 6 April 2025 while a person used the remittance basis. For a limited period of three tax years, former remittance-basis users can designate qualifying overseas capital and bring it to the UK at a reduced rate. The rate is 12% for 2025/26 and 2026/27, and 15% for 2027/28. FIG relief cannot be claimed on those pre-6 April 2025 amounts, so the TRF is the concession that lets them be remitted cheaply instead.

For trusts, the TRF matters because capital payments and income from non-UK trusts that are matched to pre-6 April 2025 foreign income and gains within the structure can be designated. Where that is the case, designating the relevant amounts under the TRF can allow historic offshore trust value to be brought onshore at 12% or 15% rather than at full income tax or CGT rates. The matching and eligibility rules here are technical, so the precise amount that qualifies as designatable overseas capital should be confirmed case by case before any funds move.

The window is short. The lowest rate applies only for 2025/26 and 2026/27, so any family intending to unlock trust value on preferential terms is working to a hard deadline within the 2026/27 tax year and the year that follows.

Because arising-basis taxation and residence-based IHT can now apply to a structure that was previously benign, many families are actively reviewing whether to keep, adapt or unwind their offshore trusts. There is no single right answer, and the correct choice depends on the settlor's residence and FIG status, the beneficiaries, the assets held and the family's long-term plans.

• Distributions and benefits: paying value out to beneficiaries, potentially using the TRF window to match to pre-6 April 2025 income and gains at 12% or 15%.
• Appointments out of trust: appointing assets to beneficiaries or to a new structure, which can crystallise exit charges and gains and must be sequenced carefully.
• Winding up the trust: bringing the arrangement to an end where the ongoing IHT relevant property exposure and arising-basis income and gains outweigh the benefit of keeping it.
• Retaining but repositioning: holding the trust but changing the asset mix, or timing action around the settlor's residence status and any exit tail.
• Doing nothing, deliberately: in some cases the trust remains the right structure, for example where the settlor is FIG-eligible or where non-tax reasons (asset protection, succession, minor beneficiaries) dominate.

Each route carries its own income tax, CGT and IHT consequences, and the order in which steps are taken can change the result significantly. Exit charges, section 86 gains and the TRF deadlines all need to be modelled together rather than in isolation. This is a live and urgent planning area, and the sensible first step is a full residence and structure review before any distribution or appointment is made.