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Terminology used in the article

Relevant property regime – The IHT regime under which chargeable assets are subject to a principal charge and an exit charge.

Excluded property regime – The IHT regime under which qualifying assets are treated as outside the scope of UK IHT, so they are not subject to the principal or exit charges.

Principal charge – An IHT charge on chargeable trust assets at each 10th anniversary of trust settlement date.

Exit charge – An IHT charge when value of assets leaves a trust, typically as a result of a trust capital distribution.

Relevant loans – Loans taken out to fund the acquisition, maintenance or capital enhancement (e.g. lease extension for a flat, a loft conversion) of a UK residential property.

Collateral – An asset that a borrower gives as security for a debt, so that the lender can enforce his rights against that asset if the borrower does not repay.

 

Before 6 April 2025, non-UK-situated assets were usually excluded property if the settlor was non-UK domiciled when the asset became comprised in the settlement. From 6 April 2025, that general rule was replaced by a Long Term Resident test.

From 6 April 2025, the basic rule for an offshore trust within the relevant property regime is this. If the settlor is alive, non-UK-situated assets are excluded property only while the settlor is not a Long Term Resident. If the settlor has died, the answer depends on the date of death. Death before 6 April 2025 preserves the old domicile-at-addition test. Death on or after 6 April 2025 means the question is whether the settlor was a Long Term Resident immediately before death.

The date 30 October 2024 matters because specified excluded property already in a trust immediately before that date is eligible for transitional protections after 6 April 2025. Those protections do not keep that property outside the IHT net altogether. Instead:

1) they disapply the gift with reservation of benefit rules for the protected property;

2) for certain pre-30 October 2024 qualifying interest in possession trusts, they prevent an IHT charge when the life interest ends or the life tenant dies; and

3) they cap the principal and exit charges on the protected property at £5 million in each 10-yearly period.

The protections apply only if the property was already in the trust immediately before 30 October 2024 and is still, at the chargeable event date, non-UK-situated property, AUT units or UK OEIC shares.

The test is not whether the trust, as a whole, is inside or outside the IHT net. Trustees must test the trust asset by asset. UK-sited assets stay in charge unless a specific exemption applies. Indirectly held UK residential property, relevant loans and collateral also remain in scope. An offshore trust can, therefore, hold both excluded property and chargeable assets at the same time.

The eight scenarios below focus on settlements within the relevant property regime. Qualifying interest in possession trusts have separate rules and are dealt with later in the article.

Scenario 1: Settlor alive but not a Long Term Resident

If the settlor is alive but is not a Long Term Resident at a chargeable event date, non-UK-situated assets are excluded property. That means no principal or exit charge on that excluded property for as long as that status continues.

This applies whether the foreign asset entered the settlement before or after 30 October 2024. The 30 October 2024 date only matters for transitional protections.

This scenario does not shelter UK-situated assets. It also does not shelter indirectly held UK residential property, relevant loans or collateral. Such assets are subject to the IHT charges regardless of the settlor’s Long Term Resident status.

Scenario 2: Settlor alive and a Long Term Resident

If the settlor is alive and is already a Long Term Resident at a chargeable event date, non-UK-situated assets are no longer excluded property and, if the trust is within the relevant property regime, can, therefore, be subject to the principal and exit charges.

For a living settlor, the old domicile test is no longer relevant. It does not matter that the trust was created years ago when the settlor was non-UK domiciled. Once the settlor has become a Long Term Resident, non-UK-situated assets fall within the IHT net unless a specific statutory protection applies.

Transitional protections matter in this scenario. Specified excluded property in a trust immediately before 30 October 2024 has transitional protection for the gift with reservation of benefit rules and can benefit from the £5 million cap on relevant property charges. That protection can also apply where the protected property is still held at the chargeable event date in the form of AUT units or UK OEIC shares. It does not, however, take that property out of the relevant property regime.

Scenario 3: Settlor alive, has left the UK, but is still within the IHT-tail period

A settlor does not stop being a Long Term Resident on the day of departure from the UK. Long Term Resident status can continue for a tail period after leaving the UK. The tail can run for between 3 and 10 tax years, depending on the settlor’s residence history.

During the tail period, trust assets remain in scope in exactly the same way as if the settlor were still UK resident. Leaving the UK, therefore, does not by itself take the trust out of the IHT net immediately.

Trustees must not assume that once the settlor becomes non-UK resident, the trust automatically reverts to excluded property status. That is wrong if the settlor is still within an IHT- tail period.

There is also a special commencement rule for certain individuals who are non-UK resident in 2025-26 and were not UK domiciled under common law on 30 October 2024. In some cases, that rule switches off Long Term Resident status altogether; in others, it preserves only a shorter tail ending at the start of the fourth non-resident year. Trustees should, therefore, check that commencement rule separately instead of assuming that the normal Long Term Resident tail always applies.

Scenario 4: Settlor alive, has left the UK, and later loses the IHT tail

Upon the settlor ceasing to be a Long Term Resident, non-UK-situated assets become excluded property at that point. From then on, these assets are outside the principal and exit charge regime.

However, an exit charge arises at that point as a result of the non-UK-situated assets ceasing to be relevant property when the settlor loses Long Term Resident status.

Scenario 5: Settlor died before 6 April 2025 and was non-UK domiciled when the asset entered the settlement

If the settlor died before 6 April 2025, the old domicile test continues to apply to non-UK-situated assets. If the settlor was non-UK domiciled when non-UK-situated assets became comprised in the settlement, such assets remain excluded property.

As always, UK-situated assets are within the IHT net. The same applies to indirectly held UK residential property, relevant loans and collateral.

In addition, any assets added later by another person (a joint settlor) after 6 April 2025 must be tested by reference to that other person’s Long Term Resident status, not by reference to the original settlor.

Scenario 6: Settlor died before 6 April 2025 and was UK domiciled when the asset entered the settlement

The test is not domicile status at death but whether the settlor was non-UK domiciled when the property became comprised in the settlement.

If the settlor died before 6 April 2025 and was UK domiciled when assets became comprised in the trust, those assets do not become excluded property simply because the rules changed on 6 April 2025. If the trust is already within the relevant property regime, the principal and exit charges continue to apply.

Trustees should not assume that every pre-6 April 2025 trust created by a deceased settlor is now protected. The result still depends on whether the old domicile test was satisfied when the asset entered the settlement.

Scenario 7: Settlor died on or after 6 April 2025 and was not a Long Term Resident immediately before death

If the settlor died on or after 6 April 2025 and was not a Long Term Resident immediately before death, non-UK-situated assets are excluded property.

The trustees do not need to keep re-testing the deceased settlor’s status in later years. Non-UK-situated assets remain outside the principal and exit charges unless another special rule brings them back in.

UK-sited assets remain in scope.

The same principle as in Scenario 5 above applies to additions by another person; the original settlor’s position does not automatically shelter later contributions made by someone else.

Scenario 8: Settlor died on or after 6 April 2025 and was a Long Term Resident immediately before death

If the settlor died on or after 6 April 2025 and was a Long Term Resident immediately before death, non-UK-situated assets are not excluded property. If the trust is within the relevant property regime, those assets remain exposed to principal and exit charges unless a later statutory change applies.

Death, again, fixes the IHT position for the trust. Trustees do not apply an annual test after the settlor’s death. They simply look back to the settlor’s Long Term Resident status immediately before death.

This scenario is often where trustees discover that an old excluded property trust is now fully within the IHT net for foreign assets, even though the trust was originally funded by a non-UK domiciled settlor.

This is a common trap for many old excluded property trusts. Before the IHT rule changes, trustees may have proceeded on the basis that non-UK assets settled by a non-UK domiciled settlor would remain outside the IHT net indefinitely. That is no longer correct where the settlor dies on or after 6 April 2025 as an LTR. In that case, the settlor’s LTR status immediately before death cements the position. Transitional protections discussed below afford some protections, although to a limited extent because those protections do not restore the excluded property status.

Transitional protection and post-30 October 2024 additions

Assets that were excluded property in the settlement immediately before 30 October 2024 are given transitional protections. The protections continue where the property is still held at the chargeable event date as non-UK-situated property, AUT (Authorised Unit Trust) units or UK OEIC (Open Ended Investment Companies) shares.

First, the protection against the gift with reservation of benefit rules. Specified excluded property already in the trust immediately before 30 October 2024 is disregarded for gift with reservation purposes, provided it is still non-UK-situated property, AUT units or UK OEIC shares at the chargeable event date. This matters particularly for settlor-interested trusts.

Second, the protection for qualifying life interest trusts. Where specified excluded property was already in the trust immediately before 30 October 2024, and the qualifying life interest already subsisted at that date, that property is protected from an IHT charge when the life interest ends or on the death of the qualifying life tenant, provided the property is still non-UK-situated property, AUT units or UK OEIC shares at that time.

Third, the protection in the form of a cap on relevant property charges. If specified excluded property is nevertheless within the relevant property regime from 6 April 2025, the principal and exit charges on that property are capped at £5 million in each relevant 10-yearly cycle. This cap is mainly relevant to trusts holding very substantial funds or assets.

Later additions made on or after 30 October 2024 do not qualify for the transitional protections. They must be tested under the Long Term Resident rules and, where relevant, the gift with reservation of benefit rules. However, later additions do not taint the earlier protected property, but trustees need good records to keep the two pools separate.

Qualifying interest in possession trusts

From 6 April 2025, non-UK-situated assets in such trusts are excluded property only if the Long Term Resident condition is met by reference to both the settlor and the life tenant.

If the settlor is alive, non-UK-situated assets are excluded property only if both the settlor and the current life tenant are not Long Term Residents at a chargeable event date.

If the settlor died on or after 6 April 2025, non-UK-situated assets are excluded property only if the settlor was not a Long Term Resident immediately before death and the current life tenant is also not a Long Term Resident at a chargeable event date.

Where the settlor died before 6 April 2025 and was non-UK domiciled when the foreign property entered the settlement, non-UK-situated assets remain excluded property and the life tenant’s later Long Term Resident status does not change that result.

Transitional protection matters here. If specified excluded property was already in the qualifying interest in possession trust immediately before 30 October 2024, and the qualifying life interest already subsisted at that date, that property is protected from a charge when the qualifying life interest ends or on the death of the qualifying life tenant, provided the property is still non-UK-situated property, AUT units or UK OEIC shares at that time.

Asset type still matters

UK-sited assets are not excluded property. The trust being offshore does not change that.

Indirectly held UK residential property remains in scope. Trustees should also review relevant loans used to finance UK residential property and collateral given for such loans. Those rules can keep value in charge even if the legal owner is an offshore company.

Holdings in an authorised unit trust or a UK OEIC are a statutory special case. They can be excluded property when the settlor is not a Long Term Resident, and they also count as qualifying assets for the transitional protections.

There is also a narrow special rule that no exit charge arises merely because relevant property stops being relevant property when it is invested in an AUT or a UK OEIC. That does not create a general exemption for all investment switches.

It may be tempting for trustees to switch assets in order to avoid an IHT charge nearer a chargeable event date. Proper regard should be had to FA 2026 s 73, which inserts IHTA 1984 s 65(8B), (8C). For events on or after 26 November 2025, the exemptions in IHTA 1984 s 65(7), (7A) and (8) can be disapplied where a long-term residence change has occurred and no exit charge arose at that time because the relevant property was not non-UK property. A subsequent switch into non-UK assets, AUTs/OEICs or other excluded property may, therefore, still trigger a s 65 exit charge. It is worth noting that HMRC’s internal guidance has said that in a case where “… the trust disposes of UK situs assets and also acquires AUTs / OEICs must be referred to Technical”.

Practical points for trustees

Trustees may wish to keep an asset history that separates:

(i) property already in settlement immediately before 30 October 2024 that qualified as excluded property;

(ii) later additions; and

(iii) assets derived from each pool. Without that audit trail, it can be difficult to prove that transitional protection still applies.

Where the settlor is alive, trustees should review the settlor’s Long Term Resident position on a yearly basis. It is worth noting that a split year counts as a full year of UK residence for these IHT purposes.

Trustees should also check the special transitional rule for individuals who become non-UK resident in 2025-26. In some cases, that rule can switch off Long Term Resident status altogether or shorten the usual IHT-tail period.

Do not assume that the trust is either wholly within or outside the IHT net. Mixed funds are common. One pool may be excluded property, another may be relevant property, and a third may be protected only under the transitional rules.

If the trust holds UK residential property through an offshore company, or loans or collateral linked to such property, that part of the structure must not be ‘ignored’.

If the settlor has died, identify the date of death first. Death before 6 April 2025 usually preserves the old domicile test for non-UK-situated assets. Death on or after 6 April 2025 switches the test to Long Term Resident status immediately before death.

If property was added after the original settlor’s death or by another person during the lifetime of the original settlor, analyse that addition separately. Do not assume that the original settlor’s status governs the whole fund forever.

This article is provided for general information only. It does not constitute tax, legal or other professional advice, and should not be relied on as a substitute for specific advice based on your particular circumstances.