New UK Trust Rules Can Protect Wealth for International Families

Trusts have long been used in succession planning either in lifetime or on death, especially for asset protection where there are concerns over direct ownership of assets. New UK tax rules that took effect April 6 may lead to more opportunities to transfer wealth tax efficiently to a trust and protect family wealth for the next generation and beyond.

The UK residence status of the settlor—the person transferring wealth to the trust—will be vital to understand. Depending on the residence status, there could be UK tax consequences for settlor and trustees. But with careful planning, it’s possible to structure wealth tax efficiently and meet family objectives. In some cases, there will be scope to create trusts without any UK tax consequences.

The interaction of tax, legal, and regulatory issues in the UK and other relevant jurisdictions need to be considered. However, the potential economic and family benefits can be significant.

Long-Term Resident

The concept of a long-term resident comes into effect from April 6. This is defined as a person who has been resident in the UK for 10 or more years out of 20. Once a person is a long-term resident, their worldwide assets come into the scope of UK inheritance tax when they die, subject to other reliefs. The rate of inheritance tax is 40%, so wealth can be significantly and suddenly eroded.

If the settlor of a trust isn’t a long-term resident, any foreign assets of the trust are protected from UK inheritance tax.

International families with substantial foreign wealth accumulated with non-UK resident parents or grandparents, and whose children or grandchildren are living in the UK, may wish to consider settling that wealth, where possible, for the benefit of the next generation rather than risk passing it directly to a long-term resident.

If the long-term resident dies holding the wealth, it could be reduced by inheritance tax at 40%. But if the parents or grandparents had transferred the wealth to a trust, it can be fully protected from UK inheritance tax.

The tax position for the trustees is also favorable. Provided the trust only holds foreign assets, there is no UK tax exposure. If the trustees invest in UK assets, these will be subject to 10-yearly and exit charges at a maximum tax rate of 6%.

As trustees can choose what to invest in they can decide to invest only in non-UK situs assets, subject to investment advice.

When a settlor becomes a long-term resident, the UK gift with reservation-of-benefit rules put all the trust assets in their personal estate if they’re capable of benefiting from the trust. This puts the trust assets at potential risk of a 40% inheritance tax after the settlor’s death.

If the trust was settled before October 2024 by a settlor who was nether domiciled nor deemed domiciled in the UK, and contains only foreign assets, it generally will be outside of the rules.

Trustees also will be subject to 10-yearly periodic and exit charges (between 0% to 6% on the value of capital that leaves the trust) on all trust assets rather than only UK assets.

In the future, anyone who settles a trust while they are not a long-term resident should consider whether they should be excluded from benefit together with a spouse, before there is risk of them becoming UK long-term residents.

Understanding overall affordability for exclusion and the purpose of the wealth is essential to ensure wealth serves the family in an optimal way.

If a long-term resident settlor ceases to be long-term resident, their UK inheritance tax exposure won’t immediately vanish. There is an inheritance tax tail, meaning the person doesn’t leave the scope of UK inheritance tax immediately, but only after a number of years following their departure. The number depends on how many years out of the previous 20 a long-term resident has been in the UK.

There also is an immediate inheritance tax exit charge for trustees based on the value of trust assets when the settlor ceases to be long-term resident. This can cause an unexpected tax charge with a strict time limit for payment and, without advance planning, could create liquidity or other concerns for the trust.

Family Business

Any assets can potentially be settled on trust and can include assets to be kept in the family, such as shares in a family business. A key concern is often a potential sale outside the family if assets are left directly to a family heir who is uninterested in the business.

The restriction to business property relief and agricultural property relief from April 2026 means that qualifying family business shares should be considered for settlement without limit before April 6, 2026, to secure continuity of the business for the next generation.

From April 6, 2026, there still will be scope to settle qualifying shares, but tax relief will be restricted. An aggregate value of £1 million ($1.33 million) of qualifying business property relief and agricultural property relief assets can be gifted to a trust every seven years. Therefore, it could take significantly longer to pass the shares into trust.

In the meantime, there is ongoing risk of 40% inheritance tax on the death of a shareholder that can lead to a sudden tax charge, which could jeopardize the legacy.

With a trust, the trustees will pay inheritance tax on 10-yearly and exit charges at the rate of up to 6% unless they qualify for relief. These are much less than the death tax rate, so they’re usually manageable and can be planned for.

Navigating complex tax rules across the globe and adapting to changes in laws can be challenging. The possibility to protect family wealth in a regulated, respected and well-governed structure that can serve families for generations to come is looking more attractive than ever.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Liz Cuthbertson is partner at Mercer & Hole, providing tax planning for UK and non-UK domiciled clients.

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