Non-doms and Gift with Reservation of Benefit

The Chancellor of the Exchequer, in his Budget on 6 March 2024, announced an intention to abolish the concept of domicile (as it applies to tax) and the remittance basis from April 2025.

In addition, it is intended to move to a residence-based regime for Inheritance Tax (IHT) from 6 April 2025. It’s important to look at how these potential tax changes may impact trusts, excluded property status and the applicable anti-avoidance legislation, so taxpayers can consider whether they may need to take action as soon as possible.

What changes have been announced?

Broadly, the government’s announcement suggests that individuals who have been tax resident in the UK for 10 tax years will be subject to UK inheritance tax (IHT) on their worldwide assets, and a 10-year tail will also apply to those who leave the UK and become non-UK tax resident. This will impact assets held personally by affected individuals, but also assets held within trusts they have settled.

The government also announced that the current IHT treatment applicable for excluded property trusts set-up by non-UK domiciled individuals with non-UK situs assets prior to 6 April 2025 will be grandfathered, such that the trust’s assets should continue to be treated as excluded property, and therefore outside the scope of UK IHT.

However, the Labour Party have signalled their intention to remove any grandfathering of the IHT excluded property status of existing trusts. The overall impact of the grandfathering of excluded property status (or lack of grandfathering if the Labour Party win the looming general election) will largely depend on the outcome of the upcoming IHT consultations.

Additionally, as published in their manifesto, the Labour Party have pledged to apply IHT to all  trusts, regardless of when they were created, meaning any assets held in these trusts will be subject to IHT. The manifesto also outlines the Party’s intention to abolish the non-dom status completely.

This article is, therefore, largely written based on the rules as they stand but taking account of the changes announced by the Conservatives together with observations made by the Labour Party. The tax regime for non-doms may change further depending on the outcome of the upcoming General Election and consultation.

The impact of domicile and excluded property status

Excluded property is a form of property which is outside the scope of IHT. Excluded property includes non-UK situs assets that are held by individuals who are neither domiciled nor deemed domiciled in the UK.

Non-UK doms are only subject to IHT on their UK situs assets, whereas individuals domiciled in the UK (including those who are deemed-domiciled for tax purposes) are subject to IHT on their worldwide assets (although reliefs may apply). This is the case regardless of where the individual is resident at the date of death or another chargeable event.

Moreover, non-UK situs assets comprised within the trust are regarded as excluded property if settled at a time when the settlor was neither UK domiciled nor deemed-domiciled. Excluded property which is held by a trust is outside the scope of IHT, and this status may, in certain circumstances, not be lost even if the settlor later becomes deemed UK domiciled.

What are the Gift with Reservation of Benefit (GROB) rules?

The GROB rules are a set of anti-avoidance provisions which seek to prevent an individual from reducing the value of their estate chargeable to IHT at death, by giving away property during their lifetime but continuing to benefit from the property given away. The application of this anti-avoidance provision must, at present, be considered in line with excluded property exemptions.

The legislation defines a GROB with reference to “enjoyment of the property”, which includes use, occupation, receipt of income, and possession. Broadly, if possession and enjoyment are not effectively transferred to the gift recipient, or the property is not at any time enjoyed to the entire exclusion or virtually the entire exclusion of the donor, the property may remain within the donor’s death estate for IHT purposes. It makes no practical difference whether the donor’s enjoyment of the property, or related benefit, is enforceable under contract, by specific agreement, or arises merely incidentally.

If the enjoyment conditions cease at any point during the donor’s lifetime, the individual is regarded as having made a potentially exempt transfer (PET). In accordance with general principles, the property only becomes chargeable to IHT in the event the donor does not survive seven years following the date the reservation of benefit in the property ceases.

A GROB may arise following the creation of a trust in which the donor has retained an interest (a ’settlor interested trust’). If the settlor of a trust does not specifically and irrevocably exclude themselves from the potential to benefit from the trust, the GROB rules may apply. As above, if the donor settles property on trust reserving a benefit, and their reservation in the settled property ceases during their lifetime, this will result in a PET.

How does GROB impact excluded property trusts?

At present, if a settlor is treated as reserving a benefit in an excluded property trust, the non-UK situated property is outside the scope of IHT and is therefore not treated as forming part of the settlor’s chargeable death estate.

Similarly, if a reservation in an excluded property trust ceases during the settlor’s lifetime, no account is taken of the value of excluded property in determining the value of the PET for GROB purposes.

It’s expected, albeit subject to consultation, from 6 April 2025, the chargeability of assets comprised in offshore trusts will depend on whether the settlor meets the residence-based criteria (discussed above) on the relevant dates for IHT. These are:

• When assets are settled into trust,
• The 10-year anniversary of the trust,
• When assets are distributed from the trust, and
• The death of the settlor (if the GROB rules apply).

Trusts which were previously outside the scope of IHT may therefore fall within the scope of IHT from 6 April 2025, depending on the outcome of the IHT consultation, the Party in Power following the general election on 4 July and tax policy with regard to the grandfathering of excluded property trusts settled before 5 April 2025. This exposure may apply for the full 10-years after the settlor leaves the UK.

It should also be noted that for trusts where the GROB rules apply, this can place the trust assets within the charge to IHT twice; the trustee charges (on 10-year anniversaries and exit charges), and secondly on the death of the settlor.

What do trustees and settlors of offshore trust structures need to consider?

In light of the uncertainty around the UK IHT regime for non-doms, many individuals and trustees are considering their options for settled property. It’s likely that some non-doms will move onto pastures new, becoming non-UK tax resident. This would not, based on our current understanding of the proposed legislative changes, serve to immediately remove the settlor from an exposure to IHT on non-UK situs assets held on trust, but it could enable the settlor to start the ‘clock’ for the purposes of the 10-year tail.

There are many non-tax related reasons for remaining in the UK and, as such, we recommend that all structures are considered in the current tax year to ensure they are fit for purpose and where appropriate, restructured.

Here are the considerations to keep in mind:

• Is the current structure still fit for purpose? If not, what are the tax and legal costs of terminating the trust vs maintaining the structure? Consideration of the non-tax related benefits of trusts such as succession planning, bypassing probate issues, protection of family assets should also be considered.
• If terminating the trust, should this take place pre-5 April 2025 while the assets are still excluded property and non-doms can claim the remittance basis? The appointed assets will be in the estate of the recipient beneficiary; however, this should mitigate the trustee’s IHT exposure.
• If terminating the trust, which beneficiary(ies) should receive the assets?
• If you’re intending to keep the trust, should the settlor be irrevocably excluded from benefitting? This would mitigate the settlor’s IHT exposure under GROB and possibly other anti-avoidance provisions. Again, should this take place pre-5 April 2025 to avoid a PET? The exclusion of the settlor may not always be beneficial, desirable or achieve the anticipated effect.

How we can help

We provide advice and support to UK non-doms, and we’re also part of Nexia, a global network of independent accounting and consulting firms that operate internationally in over 122 countries. This means we can provide you with multi-jurisdictional support to find the right solution.

This is a complex area, so professional advice should always be sought before taking any action. If you’d like to understand more about this topic and the options available to you, please get in touch with Steven Coelho.