Excluded Property Trust Inheritance Tax: The New Reality
Excluded property trust inheritance tax now turns on long-term residence, not domicile. See which offshore structures survive — book a confidential review.
Structures built for an older regime
Excluded property trust inheritance tax protection no longer rests on the settlor's domicile at the moment of settlement. From 6 April 2025 the UK moved to a long-term residence test, and the consequence is structural: a settlement's inheritance tax status is now a live variable that tracks the settlor's residence history, rather than a fixed characteristic locked in decades ago. Some structures survive intact. Many do not.
What actually changed, and why it is more serious than it first appears
For four decades the logic of the excluded property trust was elegant and durable. A non-UK domiciled settlor placed non-UK situs assets into a non-UK resident trust before acquiring deemed domicile. The assets became excluded property. That status was tested at the date of settlement and, critically, it stuck. The settlor could subsequently become deemed domiciled, live in London for thirty years, and die a UK domiciliary — and the trust's non-UK assets remained outside the inheritance tax net. It was one of the few genuinely permanent outcomes in British tax law.
The abolition of the domicile concept removed the anchor. Under the residence-based regime, the question is not "what was the settlor's domicile when the trust was funded?" but "is the settlor a long-term resident now?" That is a question with a different answer every year. It can change with a relocation, a sabbatical, a return, a death. And where the answer is yes, the non-UK assets of the settlement generally cease to be excluded property and enter the relevant property regime — with its periodic and exit charges — for as long as that status persists.
The practical effect is that a category of planning previously understood as "done" has been reopened. Trustees who have not looked at a deed since 2009 are now holding structures whose tax character may have inverted without a single administrative act on their part.
The long-term residence test in outline
The test is mechanical rather than intentional, which is both its virtue and its danger. Broadly, an individual becomes long-term resident once they have been UK resident for ten out of the previous twenty tax years. There is no counterfactual about where you intend to die, no evidence of a chargeable connection, no argument about a domicile of choice. You either meet the count or you do not.
Two features deserve emphasis for anyone with a settlement:
- It is a rolling test. Status is assessed on an ongoing basis, so a settlement can move into the relevant property regime, out of it, and back in again across the settlor's lifetime. Trustees must track the settlor's residence, which many trust instruments never contemplated obliging them to do.
- There is a tail on departure. Leaving the UK does not immediately end long-term resident status. A tail period applies, scaling with the length of prior residence — commonly three years for shorter-stay residents rising to around ten years for those with the longest histories. A ten-year anniversary falling inside that tail is a chargeable event.
- Death does not necessarily end the analysis. Where the settlor dies while long-term resident, the settlement's exposure can persist, and gift with reservation questions may run in parallel.
Which excluded property trusts still work?
The honest answer is: fewer than most settlors assume, but more than the alarmed commentary suggests. Structures fall into three broad populations.
Population one: the still-working trust
A settlement funded with non-UK assets by a settlor who has never been long-term resident, and is not projected to become one, continues to operate as intended. The classic case is the internationally mobile founder who has spent five or six of the last twenty tax years in the UK, holds a Jersey or Guernsey settlement, and manages arrivals with discipline. Nothing has broken. What has changed is that the outcome is now conditional rather than permanent — it must be monitored, and the day-count discipline that previously governed only income and gains now also governs inheritance tax on the entire settled fund.
Population two: the trust that has quietly flipped
This is the largest and most exposed population. A settlor arrived in the UK in, say, 2005, settled non-UK assets into an offshore trust in 2008 before acquiring deemed domicile, and has lived in London ever since. Under the old regime the trust was watertight forever. Under the new one, the settlor is unambiguously long-term resident, and the settlement's non-UK assets sit inside the relevant property regime. The trust has not moved. The settlor has not acted. The tax character changed by operation of statute.
The cost of this population is not theoretical. A periodic charge of up to 6% applies at each ten-year anniversary, with proportionate exit charges on capital distributions in between. On a settlement of £30m, a full periodic charge approaches £1.8m per decade. That is before valuation costs on illiquid holdings, before the compliance burden of establishing historic values, and before the practical problem that many such trusts hold assets — private company shares, art, real property — that cannot easily be liquidated to fund a charge.
Population three: the trust that was always more fragile than it looked
Settlor-interested structures belong here. Where the settlor retained a benefit — most commonly by remaining within the class of discretionary beneficiaries, an almost universal feature of trusts drafted for flexibility — the gift with reservation of benefit rules may now treat the settled assets as remaining in the settlor's estate. That produces a 40% charge on death, which is a materially worse outcome than the relevant property regime's 6% per decade. Historically the excluded property status made the point academic. It is no longer academic.
Any settlor reviewing an offshore structure should establish immediately whether they are a beneficiary. It is the single highest-severity fact in the file.
How do the UK and US regimes now interact?
For dual-exposed clients — the American in Kensington, the Briton with US-situs holdings, the founder with a green card and a Jersey trust — the two systems have never been further apart in their logic. The UK now taxes trusts by reference to the settlor's residence. The US continues to tax by reference to citizenship and, for trusts, by reference to grantor status and estate inclusion. Neither system credits the other's charges on settled property.
| Feature | UK (HMRC) post-2025 | US (IRS) |
|---|---|---|
| Connecting factor | Long-term residence of the settlor (broadly 10 of last 20 tax years) | Citizenship or domicile for estate tax; grantor status for income tax |
| Charge mechanism on trusts | Relevant property regime — periodic charge up to 6% per ten years plus exit charges | Estate inclusion at death (grantor trusts) or GST/transfer tax on funding |
| Timing | Recurring, decennial, during lifetime | Event-driven — gift, death, generation-skipping transfer |
| Headline rate exposure | 6% per decade; 40% if caught by gift with reservation | 40% federal estate/gift rate above the exemption |
| Effect of leaving the jurisdiction | Status persists for a tail of roughly 3-10 years | No effect absent formal expatriation, which triggers its own exit regime |
| Trust transparency | Trust is a separate chargeable entity for IHT | Foreign grantor trust is transparent — income taxed to the grantor |
| Credit for the other's tax | None for periodic charges | None for UK periodic charges |
The mismatch produces a specific and underappreciated outcome: a US-citizen settlor who is long-term resident in the UK may face UK periodic charges every decade on a trust that will also be fully includible in their US taxable estate at death. The same assets, taxed twice, on two clocks, with no relief between them. The 1978 estate and gift tax convention offers some assistance where the settlor is genuinely treaty-resident in the US, but it was drafted in a domicile world and its application to a residence test is not seamless. Our cross-border tax planning team models these interactions before any restructuring step is taken, because a move that solves the UK problem frequently worsens the US one.
What are the realistic options for a trust that has flipped?
There is no clean unwind. Every route carries a cost, and the correct choice is the one whose cost is lowest against your actual timeline — not the one that eliminates the charge in principle.
Accept the regime and manage it
For many settlements this is the right answer, and it is undersold. A 6% decennial charge is an effective annual drag of roughly 0.6% — meaningful, but comparable to a fee load that many families tolerate without complaint on far less useful structures. If the trust delivers real succession, asset protection, or governance value, paying to keep it can be entirely rational. The work then becomes liquidity planning: ensuring the trust can fund the charge without a forced sale of the founder's holding company shares in a bad year.
Distribute and restructure
Winding up crystallises an exit charge, but if the trust holds assets that are appreciating fast, an exit now at today's values may cost less than a periodic charge at a future valuation. This is arithmetic, not ideology. It demands a projection of asset growth against anniversary dates. It also demands care on the US side, where distributions from a foreign non-grantor trust to US beneficiaries can trigger throwback tax and interest charges that dwarf the UK saving.
Excise the settlor's interest
Where gift with reservation is the exposure, irrevocably excluding the settlor and their spouse from benefit removes the 40% death charge risk and leaves the trust in the relevant property regime — a significant improvement. It is rarely painless: the settlor loses access, and the exclusion must be genuine and complete. Half-measures fail. This step is often paired with a family investment company or a separate liquidity pot to replace the settlor's practical access.
Change the settlor's residence trajectory
The most powerful lever, and the least convenient. Because status is now residence-based, it is genuinely reversible. But the tail period means departure must be planned years ahead of the anniversary you are trying to avoid, and a departure that leaves a ten-year anniversary inside the tail achieves nothing. For clients already contemplating a move, sequencing the move against the trust calendar is the highest-value planning available. Our private wealth advisers routinely model departure dates to the tax year.
Do nothing, deliberately
For a settlor approaching the end of their long-term resident tail, or a trust whose next anniversary is eight years out, the correct action may be to document the position, diarise the dates, and revisit. Precipitate restructuring in a regime whose detail is still bedding in has already cost several families more than the charge they were fleeing.
What trustees need on file right now
Whatever route you take, the evidential position must be rebuilt. Under the old regime, trustees needed one fact: the settlor's domicile at settlement, established once. Under the new one, they need an ongoing record. Specifically:
- A residence history for the settlor covering at least the last twenty tax years, with supporting evidence — not a recollection.
- A situs schedule for every underlying asset, refreshed. UK-situs assets in an offshore trust were always chargeable; the number of settlements that have quietly acquired UK real property or UK company shares through an underlying company is higher than most trustees expect.
- Historic valuations, because periodic charges require values at anniversary dates and reconstructing a 2016 valuation of a private holding in 2036 is expensive and contestable.
- The next three anniversary dates, diarised, with a liquidity plan attached to each.
- A beneficiary class analysis, confirming precisely whether the settlor or their spouse is within it.
- Coordinated US filings where any settlor or beneficiary is a US person — Forms 3520 and 3520-A in particular, where penalties for late filing are severe and assessed automatically.
Where US reporting has slipped — and in long-standing offshore structures it frequently has — the position is usually correctable before it becomes a penalty case. Our IRS streamlined filing practice handles precisely this pattern: a compliant UK family that never appreciated the US trust reporting overlay until a beneficiary acquired a green card.
Is there still a case for creating a new offshore trust?
Yes, but the case has narrowed and the timing has become everything. The window is the period before a settlor becomes long-term resident. An executive arriving in the UK with a four-year assignment, or a founder in year three of a UK residence, can still settle non-UK assets into a structure that will be excluded property for as long as they remain outside long-term resident status — and, critically, that status is now something they control by managing their own residence rather than something fixed by an ancestral domicile they cannot change.
That is, in one narrow sense, an improvement. Domicile was an accident of birth and an evidential minefield. Residence is a decision. For internationally mobile wealth with genuine optionality about where to live, the new regime is more legible than the old one — provided the structure is built with the assumption that protection is conditional and must be actively maintained. It is precisely the wrong regime for a family that intends to settle permanently in the UK and hoped a trust would solve the problem. It never will again.
The corollary is that the quality of the initial advice now matters more, not less. A trust settled a year too late is not a suboptimal trust; it is a trust that has acquired a decennial charge from birth. Our trusts and estate planning specialists assess residence trajectory before the deed is drafted, not after.
The uncomfortable conclusion
The excluded property trust has not been abolished. It has been converted from a permanent shelter into a conditional one — and conditional structures require maintenance, monitoring, and a willingness to act when the condition fails. The families who will do badly out of this transition are not those with the largest exposure. They are those whose trustees are still administering a 2008 deed on 2008 assumptions, discovering the change at an anniversary date with an illiquid balance sheet and no plan.
The audit is not difficult. It is three facts: the settlor's long-term resident position, the situs of the assets, and the next anniversary. Most reviews conclude in weeks. Some conclude that nothing needs to be done, which is a valuable finding rather than a wasted exercise.
If you hold an offshore settlement whose inheritance tax position has not been reassessed since the regime changed — or if you are a US person with a UK-exposed trust and no clear view of how the two systems intersect — we would welcome a confidential conversation. Jungle Tax advises founders, executives and international families on precisely these structures, on both sides of the Atlantic and with a single view of the whole position. Speak to our private client team for a discreet, no-obligation assessment of where your structure now stands, or explore our wider technical guides for related analysis.
