This post has been contributed by Amanda Taylor, University of London Teaching Fellow for Equity and Trusts.
“A settlement (i.e. trust) created by an individual before they acquired a UK deemed domicile. Broadly, from 6 April 2017, capital gains and foreign income of protected settlements cannot be taxed on the settlor of a settlor-interested trust as they arise unless the protected status is lost” (LexisNexis, 2024).
The reason I have given you this definition to read is because things are probably about to change in the UK and the change might be costly to those who have been shielded up to now.
Let me explain the definition above; it starts with the trust property belonging to the settlor and the settlor not being UK domiciled. If the property is put on trust and the settlor is one of the beneficiaries then the property, as far as the UK is concerned, is not liable to tax because of the non-domiciled status.
However, if the settlor (as a beneficiary) then goes on to gain a UK domiciled status, the UK still does not recognise that property as subject to UK tax.
Although in Spring 2024 the UK Government of the time assured interested parties that the situation would not change, the change of Government in July 2024 might mean the situation will change in the future.
“Unless lobbying efforts are successful, it is safe to assume that even existing excluded property trusts will no longer benefit from IHT protection from April 2025” (Mishcon de Reya, 2024).
It is expected that the long-term UK resident will now see the property being taken into consideration for UK tax and lose its protected status. The financial impact of that could be huge if the property is of considerable size and the problem is not just for the beneficiary, but probably more so for their family as it will become part of the settlor’s estate on their death and may be subject to inheritance tax.
Inheritance Tax in the UK, given that there are certain amounts excluded from tax or taxed at 0%, is at 40%.
Tax (estate) planning has always been something the wealthy have had high on their priority list. That planning may now have to re-shuffled to consider the potential change in the law.
Of course, should one want to relinquish themselves of the asset during their lifetime to benefit their family, then the property is no longer theirs to enjoy.
This leads back to the age-old conundrum. Do you just enjoy your property during your lifetime and not worry about what happens when you no longer are around, or do you try to ensure your family, who will be left after your death, will benefit to the maximum without huge tax bills?
Some might think it is a good problem to have…
LexisNexis (2024). Protected settlement definition. Link: https://www.lexisnexis.co.uk/legal/glossary
Mishcon de Reya (2024). Offshore trusts with UK resident settlors: Last chance to restructure? Link: https://www.mishcon.com/news/offshore-trusts-with-uk-resident-settlors-last-chance-to-restructure