Offshore trusts and inheritance tax still fit together the way they always did in principle: assets held in a properly structured offshore trust can sit outside the UK inheritance tax net as “excluded property.” What changed on 6 April 2025 is the test for when that protection applies. The UK replaced its domicile-based system with a residence-based one, so whether a trust’s foreign assets escape the 40% charge above the £325,000 nil-rate band now turns on how many tax years the settlor has been UK resident, not where they consider home. US-connected settlors face a second layer of federal estate tax and reporting rules that operate independently of anything the UK does.
The Long-Term UK Residence Test
From 6 April 2025, HMRC treats you as within the UK inheritance tax net on worldwide assets once you have been UK resident for at least 10 of the previous 20 tax years. Cross that threshold and you become a “long-term UK resident.” Fall short of it and only your UK-situated assets are taxable.1GOV.UK. How Inheritance Tax Works: Thresholds, Rules and Allowances
The old domicile concept let someone live in the UK for years and still keep offshore assets outside inheritance tax if they maintained a genuine intention to return home. That subjective test is gone. The new one is mechanical: count tax years of residence in the last 20, and the answer decides the tax treatment. Someone who moves to the UK at 30 and stays can be a long-term UK resident by 40, at which point their offshore trust assets can be pulled into charge.
Leaving the UK Doesn’t End Exposure Immediately
Once you have become a long-term UK resident, emigration does not immediately release your worldwide assets. An inheritance tax “tail” keeps the global estate within scope for a period after departure. Someone resident for 10 to 13 of the past 20 years faces a minimum three-year tail. That period extends by one year for each additional year of UK residence, up to a maximum of ten years. A person who lived in the UK for 20 years and then left remains exposed to UK inheritance tax on worldwide assets for a full decade afterwards.
The tail catches both personally held assets and interests in offshore trusts. A chargeable event during the tail, including death, produces the same liability as if the person were still UK resident.
How Excluded Property Status Now Works
The inheritance tax protection offered by an offshore trust runs through the “excluded property” rules. Assets that qualify sit outside inheritance tax entirely: they are not counted in the settlor’s estate on death and they escape the trust’s periodic and exit charges.
Under the pre-April 2025 rules, excluded property status was locked in at the moment the trust was funded. If the settlor was not UK-domiciled at settlement, foreign-situated assets stayed excluded property permanently, even if the settlor later became deemed domiciled. Section 48 of the Inheritance Tax Act 1984 originally provided that framework.2Legislation.gov.uk. Inheritance Tax Act 1984 – Section 48
The Finance Act 2025 removed the domicile-based subsections and replaced them with a test that reruns at every chargeable event.3Legislation.gov.uk. Finance Act 2025 – Schedule 13 At each ten-year anniversary, each exit distribution, and the settlor’s death, HMRC asks whether the settlor is a long-term UK resident at that moment. If they are not, foreign-situated trust assets are excluded property. If they are, those assets are within charge, regardless of the settlor’s status when the trust was created.
The protection is no longer fixed. It can appear, disappear, and reappear over the life of a trust as the settlor’s residence position changes.
Transitional Protection for Trusts Settled Before 30 October 2024
The Finance Act 2025 preserves some old-regime protection for trusts that predate the announcement. Where settled property was in a trust before 30 October 2024 and qualified as excluded property under the old rules at that date, and a beneficiary held an interest in possession before 30 October 2024, that property is left out of account in determining the beneficiary’s estate on death, provided it remains situated outside the UK and is not attributable to UK residential property.3Legislation.gov.uk. Finance Act 2025 – Schedule 13
These provisions are narrow. They protect specific interests in place before the announcement date, not whole categories of trust. A trust settled in 2010 by a non-domiciled individual might benefit for a beneficiary whose interest predates 30 October 2024, but a fresh appointment made after that date to a different beneficiary would not receive the same treatment.
A separate transitional effect ran the other way on 6 April 2025 itself. Where a settlor was not a long-term UK resident on that date and had foreign trust assets that had previously been taxable because the settlor was UK-domiciled under common law, those assets may have become excluded property on 6 April 2025, potentially triggering a proportionate exit charge as they left the relevant property regime.4HM Revenue & Customs. Inheritance Tax Manual – IHTM47023 – Long-Term UK Residence Test: Charges on 6 April 2025
The Charges That Apply When Protection Doesn’t
Where offshore trust assets are not excluded property, they fall into the relevant property regime, which imposes recurring charges intended to approximate the tax that would apply if the assets passed between generations personally.
The principal charge falls on each tenth anniversary of the trust’s creation, at a maximum rate of 6% of the trust’s taxable value.5GOV.UK. Trusts and Inheritance Tax The effective rate is often lower once the £325,000 nil-rate band (frozen at that level through 5 April 2030) and the settlor’s cumulative chargeable transfers in the seven years before creating the trust are taken into account.6HM Revenue & Customs. Inheritance Tax Thresholds and Interest Rates Trustees need a formal valuation of all taxable assets on the anniversary date.
Between anniversaries, an exit charge applies when assets leave the trust, whether through distributions or other transfers. The charge is proportionate to the number of complete quarters elapsed since the last ten-year anniversary (or since the trust was created, if no anniversary has fallen yet). A distribution shortly after a ten-year charge attracts very little tax; one made just before the next anniversary approaches the full periodic rate.
Liquidity matters here. A trust holding property or private company shares can struggle to meet a ten-year charge without an inconvenient sale, so trustees generally need to keep enough liquid assets on hand to pay the tax when it falls due.
UK Reporting: IHT100 and Deadlines
Trustees report chargeable events on the IHT100 family of forms.7HM Revenue & Customs. Tell HMRC That Inheritance Tax Is Due on a Gift or Trust (IHT100) IHT100d covers ten-year anniversary charges, IHT100c covers assets that have ceased to be relevant property (exit charges), and IHT100a covers lifetime gifts that are immediately chargeable.
The forms need the market value of each trust asset on the relevant date, less allowable debts, together with the trust’s legal name, its unique tax reference, and the names of current trustees and beneficiaries. Both filing and payment are due six months after the chargeable event. Late filing brings an initial £100 penalty, a further £100 if the return is still outstanding between six and twelve months after the deadline, and a possible additional penalty of up to £3,000 if the return is more than twelve months late and tax was owed.8HM Revenue & Customs. Inheritance Tax Manual – IHTM36023 – Late Accounts: Penalties Chargeable Trustees should request a unique payment reference through HMRC’s online portal before filing to make sure funds are correctly allocated; payments are usually made by BACS, CHAPS, or bank transfer.
US Federal Estate Tax on Offshore Trust Assets
US citizens and residents are taxed on worldwide assets at death, including interests in foreign trusts. The federal estate tax exemption for 2026 is $15,000,000 per individual under Public Law 119-21, with a 40% top rate on amounts above.9Internal Revenue Service. Estate Tax
Whether offshore trust assets are pulled into the grantor’s taxable estate depends on structure. A revocable foreign trust is treated as owned by the grantor, and its assets are included in the gross estate. An irrevocable trust can still be included where the grantor kept powers or interests, such as control over distributions or a right to income.
Non-US persons who hold US-situated assets through an offshore trust also have exposure. US-situated property, including shares in US companies and US real estate held directly by the trust, can be subject to estate tax when the foreign grantor dies. The estate tax exemption for non-US persons is only $60,000.
The generation-skipping transfer tax adds a further layer. Distributions to beneficiaries two or more generations below the settlor, such as grandchildren, attract a flat 40% GST tax on top of any other transfer tax. The 2026 lifetime GST exemption is $15,000,000 per individual, and allocating it correctly when assets first enter the trust can shelter future growth, but the allocation must be reported on Form 709 or Form 706.9Internal Revenue Service. Estate Tax
US Reporting Obligations for Foreign Trusts
The IRS requires extensive disclosure from US persons connected to foreign trusts. Three regimes overlap, and one offshore trust can trigger all of them.
Form 3520 and Form 3520-A
US persons who create a foreign trust, transfer property to one, or receive distributions from one file Form 3520 with the IRS. It is due 15 April following the tax year end, or 15 October with an extension.10Internal Revenue Service. Reminder to U.S. Owners of a Foreign Trust
US owners also need Form 3520-A filed by the trust itself. That annual return is due on the 15th day of the third month after the trust’s tax year ends, so 15 March for a calendar-year trust. An automatic six-month extension is available by filing Form 7004 using the trust’s Employer Identification Number before the original deadline. An extension on your personal income tax return does not extend Form 3520-A. If the trust fails to file, the US owner attaches a substitute Form 3520-A to their own Form 3520 to avoid the penalty.
FBAR (FinCEN Form 114)
A US person with a financial interest in or signature authority over foreign financial accounts files an FBAR when the aggregate value of those accounts exceeds $10,000 at any point in the calendar year.11FinCEN.gov. Report Foreign Bank and Financial Accounts An interest in a foreign trust that holds foreign bank accounts can bring you inside this rule. The FBAR is filed electronically through the BSA E-Filing system and is separate from the tax return.
Form 8938 (FATCA)
Under FATCA, US taxpayers with specified foreign financial assets above certain thresholds file Form 8938 with their tax return, and interests in foreign trusts count as specified foreign financial assets. Thresholds depend on filing status and whether the taxpayer lives in the US or abroad; for an unmarried filer in the US, the trigger is $50,000 on the last day of the year or $75,000 at any point during the year, with higher figures for joint filers and for taxpayers living abroad.12Internal Revenue Service. Do I Need to File Form 8938, Statement of Specified Foreign Financial Assets Form 8938 and the FBAR are not interchangeable, and many offshore trust owners and beneficiaries file both.
US Penalties for Non-Compliance
The penalties for failing to report foreign trust interests are among the harshest in the US tax code. On Form 3520, failing to report a distribution received from a foreign trust brings a penalty of 35% of the gross distribution. A US owner who fails to see that the trust files Form 3520-A faces a penalty of 5% of the gross value of the trust assets treated as owned by that person.13Internal Revenue Service. Instructions for Form 3520 The minimum in either case is $10,000, and if non-compliance continues more than 90 days after the IRS mails a notice, an additional $10,000 accrues for each further 30-day period.14Office of the Law Revision Counsel. 26 USC 6677 – Failure to File Information With Respect to Certain Foreign Trusts
FBAR penalties run separately. A non-willful failure carries a maximum civil penalty of $16,117 per violation per year. A willful failure is the greater of $100,000 (inflation-adjusted) or 50% of the account balance at the time of the violation, and criminal prosecution is possible.11FinCEN.gov. Report Foreign Bank and Financial Accounts
These penalties stack. A US person who receives a $500,000 distribution from a foreign trust and misses Form 3520 faces $175,000 on that form alone, plus potential FBAR exposure on the underlying accounts, plus Form 8938 penalties starting at $10,000. The combined figure regularly exceeds the value of the assets.
Records Trustees Need to Keep
Both regimes reward a thorough paper trail. The records that matter most are:
- A year-by-year record of the settlor’s tax residence, with supporting evidence such as tax returns, employment contracts, and property records. Under the new UK regime, counting residence years accurately is everything.
- The original trust deed and every subsequent deed of appointment, advancement, or variation, with dates that may decide transitional protection.
- Professional valuations for each ten-year anniversary, each distribution, and the settlor’s death. HMRC routinely challenges optimistic figures on real estate and private company shares.
- Dates, amounts, and recipients of every distribution, which drive both UK exit charges and US Form 3520 reporting.
- Bank and investment account statements needed for FBAR and Form 8938 calculations.
Missing a single year of residence history can make it impossible to work out whether the 10-out-of-20 threshold has been crossed. Reconstructing records after the fact is expensive and sometimes not possible at all, which is why well-run offshore trusts keep this documentation current rather than pulling it together at the point of a chargeable event.