Why expats haven’t been setting up trusts and why they might start doing so now

Curiously, very few of my expat clients have trusts. I think I know why and I think I know why that is likely to change.

Why don’t many expats have trusts?

The trouble with trusts – or, at least, most trusts – is that if you want to put any significant assets into trust, you have a 20% inheritance tax (IHT) charge to pay at the point on transferring those assets into trust.

In fact, if that IHT is not paid by the trust (for example, because you want to transfer a property into trust, rather than cash, so that the trust doesn’t have the funds to pay the tax), then the IHT rate is effectively 25% at that point, because your payment of the tax is treated as a further gift to the trust (on which IHT has to be paid)!  You will normally have a “nil-rate band” (NRB) of £325,000 which is taxed at 0%, but beyond that, you are looking at a tax rate of 20% or 25%. 

As an example, and ignoring the “annual gift exemption” of £3,000 per year, if you transfer a property worth £2,325,000 into trust and you pay the IHT yourself, then the IHT bill will be £500,000.  There might be more IHT to pay on that gift if you then die within five years.

If that were not enough, the trust will then be subject to a 6% IHT charge every ten years (again, it may have a £325,000 nil-rate band), as well as similar (smaller) “exit” charges when capital is distributed from the trust.

To cap it off, if you set up the trust and are one of the beneficiaries, then the whole lot will be treated as part of your own estate for IHT purposes – for example, when you die, so there could still be 40% IHT to pay on the trust fund at that point. This is called a “reservation of benefit”.

In summary:

• 20% / 25% IHT on the gift into the trust (potentially more IHT later).
• 6% IHT charge on the trust every 10 years.
• (up to) 6% IHT exit charges when capital leaves the trust.
• reservation of benefit (potentially 40% IHT on the full value of the trust fund when you die).

All in all, not ideal for large sums or where you, as the person funding the trust (called the “settlor”), might want to be able to benefit from it.  Even if you don’t want to benefit, to get large sums into trust without an IHT charge would require something special: for example, transferring business assets which qualify for relief from IHT (NB that relief is being substantially reduced from April 2026), making regular gifts out of your excess income or the trust being established for someone who qualifies as “disabled” under the Inheritance Tax Act 1984.

How can I avoid all of these inheritance tax issues?

Until 5th April this year, if you were not “domiciled” in the UK or were not “deemed domiciled” in the UK, then none of those issues that I have mentioned have arisen, provided that only non-UK assets were involved. 

If you were neither UK domiciled nor deemed UK domiciled, then gifts of non-UK assets were outside the scope of IHT altogether.  That also included a trust to which you gave non-UK assets, provided that the trust continued to hold only non-UK assets.  This would mean:

• no IHT on the gift into the trust.
• no 6% IHT charge on the trust every 10 years.
• no exit charges when capital leaves the trust.
• no reservation of benefit.

There are always exceptions to every rule and the main exception here is that this does not apply where the non-UK assets derived their value from UK residential property.  Other exceptions are available….!

However, the difficulty for expats was proving that they were not domiciled in the UK.

Domicile – isn’t that the same as “residence”?

In the UK, “Domicile” and “Residence” mean different things.  You can be “resident” in the UK for tax purposes, without being “domiciled in the UK”.  Domicile is to do with where your “permanent home” is, but its meaning is a bit more involved than that.

Most people born and brought up in the UK have a UK “domicile of origin”.  Strictly speaking, one is domiciled in either “England & Wales” or “Scotland” or “Northern Ireland”, rather than in “the UK” as whole.  Typically, if your parents had a UK domicile when you were born, you will have had a UK domicile of origin.  It is even possible to have a UK domicile of origin without ever having set foot in the UK!

“Domicile” is a complex area and, if you are internationally mobile or you have moved from one country to another, it is often almost impossible to be absolutely and incontrovertibly sure of your domicile position, especially if you have left the place of your domicile of origin and never plan to return. 

To acquire a different domicile (called a “domicile of choice”), you have to have your main residence in the new country and, while living there, form the intention to make that country your permanent home – to live out your days there. 

If you are from the UK and then moved abroad, you may well have bought a property in the country you have moved to but kept your home in the UK to use when you are visiting.  Which is your “main residence”?  It will not always be completely clear cut.

Even if you can establish that the property in your new country is your “main residence”, whether you have formed the intention to “live out your days” there is another matter: it is entirely subjective.  Well, sort of: the thing is that HMRC would look for the objective outworkings of that subjective intention. 

HMRC’s thought process would be: “a person who had decided to settle permanently would not have done this” or “they would have done that….”.  They would look at all of your circumstances: the number of days spent in all relevant countries, where your residences are, the comparative size of those residences, where you have been working, what clubs / societies you have joined (or not ceased to be a member of), where you are registered to vote – the list is almost endless. 

Unfortunately, it is perfectly possible that you might ask two experienced advisers to give their view on whether, in their objective opinion, you have “decided to live out your days” in your new country and receive two perfectly well reasoned, but opposing, answers.  If push came to shove, in many cases you would not know for certain which way HMRC (or, if it came to it, the tax tribunal) would decide. 

If there was a risk that HMRC would consider you to be UK domiciled, then you probably didn’t want to be transferring your hard-earned family wealth into trust, with the accompanying immediate 20% (or 25%) IHT charge.

Indeed, many people move abroad to work – maybe for 20 or 30 years – but always intend to come back to the UK to retire.  Or, like one of my clients, you may have left the UK 40 years ago and have absolutely no intention of returning to the UK, but do not plan to retire in the country you are living in at the moment.  In both cases, you would still be domiciled in the UK, so it is certainly not the case that, merely by living outside the UK for a long time, you would acquire a new domicile.

You mentioned “deemed UK domicile”?

You would have been “deemed” to be domiciled in the UK if you were not actually domiciled in the UK, but had spent sufficient time here that you would be taxed as if you were domiciled in the UK. This is mostly not relevant post-5th April 2025, except for some transitional provisions, as we have different rules now.  There were various ways that you could become “deemed UK domiciled” – but that is something for another time. 

The result of those domicile uncertainties ….

…. is that most expats, even if they have lived outside the UK for decades, felt that they were not able to be sufficiently sure whether HMRC would agree that they had acquired a domicile of choice in the place that they have moved to. 

The consequence of being UK domiciled was that all of those IHT problems that I mentioned rear their ugly heads.  Because of those tax concerns – and an immediate 25% tax charge is a pretty big “concern” – only a very small proportion of expats have, to date, transferred substantial sums into trust.  That small proportion would be either those whose circumstances are sufficiently far on the spectrum to be more or less beyond doubt, or those who are willing to play fast and loose with HMRC.

Tell me the good news!

There is rarely good news in a Budget, but the October 2024 Budget is, on the whole, good news for you if you are an expat who has been “out of the UK” for more than 10 years.  By “out of the UK”, I mean “not UK resident”. 

Why? Because, from 6th April 2025, we no longer look at your domicile when thinking about UK tax.  Instead, we now look at your history of UK residence.  If you have been UK resident in at least 10 of the previous 20 tax years, then you will be a “long-term UK resident” (a “LTUR”).

If you were UK resident in 9 or fewer tax years out of the last 20, then you are not a LTUR. 

Alternatively, you will also not be a LTUR if you are non-UK resident immediately following 10 consecutive non-UK resident tax years.  For some this could be reduced to as little as three consecutive non-UK resident tax years, but for most people moving away from the UK for the first time, it will be 10. 

I’m not a “long-term UK resident” – so what?

If you are not a LTUR, then your gifts into trust, and (on the whole) the trusts themselves, will be taxed in the same way as if you were not UK domiciled under the previous regime, provided that only non-UK assets are involved.  That means:

• no IHT on the gift into the trust.
• no 6% IHT charge on the trust every 10 years.
• no exit charges when capital leaves the trust.
• no reservation of benefit.

And that is without having to worry about the uncertainty that comes with the vagaries of domicile.  Indeed, you might have always been planning on returning to the UK: that doesn’t matter if you have been out of the UK for over 10 years.

But beware: if you become a LTUR again, all of those IHT issues arise again (except in relation to the IHT on your gift into the trust).

So, should I go and set up a trust now?

Not necessarily.  You still need to check any other applicable tax rules, such as in the country where you have moved to or anywhere else where you are subject to tax.  For example, many countries around Europe do not have trusts as part of their domestic law, which means that setting up a trust could cause tax or other reporting complications in those countries.  Other countries may be tax neutral in this context, such as the Channel Islands, the Isle of Man, some places in the Caribbean, Dubai and certain US States.

You also need to think about other UK tax implications.  For example, are there UK resident individuals who are going to be benefiting from the trust? If so, there are likely to be UK income tax and capital gains tax implications to consider.   If the beneficiaries are in other countries, what are the tax implications for them there?  Not necessarily a show-stopper, but certainly a consideration. If your primary concern is IHT, then a trust might be a good move for you.

Finally, there are costs involved in setting up and running a trust, and it tends to make your financial life more complicated, so you need to ask yourself: why would it be beneficial to have a trust at all (despite the fact that there may be no IHT issues) and does that outweigh the cost and hassle of having substantial assets held in a trust?  Common answers include:

• Using a trust would avoid a difficult and lengthy probate process and give my family quicker access to my assets on my death…
• … or easier access in the event that I lose mental capacity.
• I am an equity partner in my law firm, with unlimited liability, and I want to protect my assets, just in case there is a big claim against the business.
• I need to keep the assets out of my personal estate, in order to avoid forced heirship rules somewhere (NB this doesn’t always work!).
• I want a structure to hold my family’s wealth for future generations, but I want to get it up and running now, rather than on my death.

Other reasons are available!

Summing it all up

If you are not a long-term UK resident, you now have the option to set up trusts which are outside the scope of inheritance tax. 

Not only that, but, provided that you are sure of your UK tax residence position over the past 20 years (and, in particular, the last 10 years), you can now have confidence, in a way that you may not have had before 6th April, about how you and your trusts will be subject to IHT.

But don’t have a trust just for the sake of it! Is there a good reason to have one?

If any of this article chimes with you, we would be delighted to have the opportunity to explore these issues with you in more detail!

Please feel free to contact a member of the team.