Offshore trusts can now be highly advantageous for long-term UK expatriates
The UK Autumn Budget, presented on 26 November 2025, introduced a number of measures that will have an impact on UK and international private clients with interests offshore. It followed the wholesale dismantling of the longstanding non-domiciled and the ‘protected trust’ tax regimes from the UK tax system last April.
As of 6 April 2025, the UK government replaced ‘domicile’ as a connecting factor for liability to applicable UK taxes, including inheritance tax (IHT), and adopting a residence-based regime instead. Individuals who have been UK resident for at least 10 out of the past 20 tax years are classified as a ‘Long-Term Resident’ (LTR) and exposed to IHT on their worldwide assets.
To ensure that LTRs do not escape tax obligations immediately upon leaving the UK, the legislation includes a ‘tail’ provision. This means that, if the LTR dies within the residence tail period, their worldwide estate will still be subject to UK IHT for up to 10 years after they cease to be a UK resident.
The length of the tail will depend on the duration of the individual’s residence in the UK. The minimum length of the tail is three years, which applies to individuals who have been UK resident for 10 to 13 of the past 20 UK tax years. The length of the tail increases by one tax year for each additional year of residence, up to a maximum of 10 years.
Individuals who do not meet the criteria for LTR status generally remain liable for IHT on UK-based assets only. This aligns with the previous system, under which non-UK domiciled individuals were taxed on UK situs assets but non-UK assets were out of scope for IHT purposes.
A new Foreign Income and Gains (FIG) regime was also introduced for people moving to the UK for the first time or after living abroad for at least 10 years. Foreign income and gains are tax-free for the first four years in the UK but are then subject to standard UK tax rules.
Under the old rules, trusts set up by non-doms were free from UK IHT forever. This shelter was removed. Once the settlor is classified as an LTR, the trust falls within the UK’s ‘10-year charging regime’, which imposes a tax charge of up to 6% every 10 years or when assets leave the trust – even if the settlor is excluded as a beneficiary of the trust.
The recent Autumn Budget announced a cap for these charges: for certain trusts created before 30 October 2024, all charges for each 10-year period – including the 10-year charge and any exit charges – will be limited to £5 million. Unfortunately, the £5 million cap applies only per trust, so multiple smaller trusts settled by one settlor will not get relief.
The Budget also introduced, with immediate effect, a measure to prevent the possibility of avoiding the exit charge on non-UK assets held in trust when a settlor ceases to be an LTR by converting non-UK relevant trust property into UK-situs assets immediately prior to the exit.
From 6 April 2026, it will also no longer be possible for an individual who is not an LTR to shelter UK agricultural property from IHT by holding it via a non-UK entity. It will now be subject to the same IHT treatment that was introduced for residential property under the IHT anti-enveloping legislation in 2017. UK commercial property can still be sheltered by non-LTRs using an offshore structure.
As we have previously highlighted, the main beneficiaries of all these changes to the UK’s IHT regime, are long-term UK expatriates. Before 6 April 2025, the worldwide estates of individuals with a UK domicile of origin remained subject to IHT unless they had succeeded in shedding their domicile of origin and acquiring a new domicile of choice in a distinct jurisdiction.
This involved moving to a country and forming a permanent or indefinite intention to remain there, which created difficulties for globally mobile individuals who did not settle in any one location. It was not possible to obtain a domicile ruling from HMRC, so the IHT position of many British ex-pats was uncertain.
With the UK’s new statutory residence test in place, British ex-pats have certainty as to their residence status. If they have at least 10 tax years of non-UK residence, they can set up an overseas excluded property trust (offshore trust) without any risk of an upfront IHT charge. This may be advantageous for asset protection or succession planning, as well as managing assets for future generations.
Furthermore, subject to the tax regime in their country of residence, gains and income accumulated within the trust may not be exposed to personal taxation. Many countries, even EU states such as Italy, Greece, Cyprus and Malta, have non-domicile tax regimes that only impose tax on income and gains that are either sourced locally or are remitted to the country of residence. Income and gains that remained within an offshore trust would not therefore be subject to taxation.
Consideration will only need to be given to the IHT treatment of the trust if the expat returns to live in the UK. Previously, an individual with a UK domicile of origin in the UK who then became UK resident was immediately treated as domiciled in the UK, and taxable on their worldwide income or gains. Now their foreign assets will not be in scope of IHT until such time as they become classified as an LTR, and they can also benefit from the new FIG regime for four years.
British expats living abroad can take advantage of this favourable new regime to return to the UK for a short period, for business reasons, to care for elderly parents or to cease being resident in another jurisdiction for foreign tax planning reasons. And, because they can clearly identify their first year of UK residence, they can take the steps necessary to cease UK residence again, if and when desired.
Please contact Simon Denton sdenton@sovereigngroup.com or David Griffiths dgriffiths@sovereigngroup.com at Sovereign UK for further information or to arrange a non-obligatory call or virtual meeting to examine your circumstances and requirements.
