How does an Excluded Property Trust work?

In the past, how did EPTs work?

An EPT was a trust (with UK or overseas trustees) used by non-UK domiciled individuals (non-doms) to shield non-UK assets from IHT. If a trust was settled by a non-dom at the time, and it held non-UK assets such as an offshore bond then those assets were classified as “excluded property.” This meant they were outside the scope of IHT entirely. The settlor could be a potential beneficiary as IHT gift with reservation (GWR) rules did not apply. Crucially, an EPT provided a permanent shelter from IHT on those foreign assets – even if the settlor later became UK domiciled or deemed domiciled - that did not alter the trust’s IHT exempt status. For decades, EPTs were a cornerstone of estate planning for non-doms.

What IHT was payable when using an EPT? 

None, as the settlor was a non dom when he/she transferred excluded property to the trust. There was no chargeable lifetime transfer (CLT) as the transfer was exempt under the excluded property rules. There were no exit or 10 year anniversary charges. The assets of the trust did not form part of the settlor’s estate on death nor the beneficiaries as long as the assets remained within the trust. The trust fund needed to continue to hold excluded property.    

Once the client acquired a domicile of choice within the UK or was deemed domicile by HMRC, he/she could not top up the bond within the trust or add any further assets to the trust. The settlor needed to be a non-dom at the time the property became comprised in the trust.

An EPT was for clients who were non doms who wanted to mitigate IHT when they later become UK domiciled. The trust fund was not subject to IHT providing it held ‘excluded property’. 

Finance Act 2025 fundamentally changed IHT from a domiciled based system to a residence based system. Now, the settlor’s long term UK residency (10 out of 20 years) is the key factor determining if a trust’s assets are exposed to IHT.

Key features of EPTs (Pre 2025)

The settlor’s domicile status at the time the trust was created (and when assets were added) determined the IHT treatment. If the settlor was a non-dom when settling the trust, all non-UK assets in the trust were excluded property for IHT. This was a one-time test at creation. Subsequent changes in domicile or residency didn’t usually affect the trust’s status.

Once foreign assets were placed into an EPT by a non-dom settlor, those assets remained permanently outside the UK IHT net. Even if the settlor later became UK domiciled or lived in the UK for many years, the trust’s overseas assets stayed excluded from their estate for IHT. There was no time limit.

Because excluded property was fully outside the scope of IHT, these trusts did not fall into the “relevant property” regime that taxes discretionary trusts. An EPT’s foreign assets were not subject to 10-year periodic charges or exit charges.

The GWR provisions did not apply to non-UK assets in an EPT. In other words, a non-dom settlor could be a beneficiary of their own EPT without those assets being counted in their estate on death. This was a major advantage.

One caveat was that any additions of property to the trust after the settlor became UK domiciled would not qualify as excluded property.

Our domicile status article contains further information.

New residence based regime and new long term resident (LTR) Test

Effective 6 April 2025, the IHT landscape changed dramatically. Finance Act 2025 redefined who is subject to IHT on worldwide assets by introducing the concept of Long-Term Residence in place of domicile. Now, the settlor’s residence status at the time of a chargeable occurrence (e.g. 10^th anniversary charge) dictates whether a trust’s foreign assets are taxable. This has significantly eroded the protection that EPTs used to offer if the settlor has spent many years in the UK.

An individual is considered an LTR for IHT if they have been UK tax resident for at least 10 out of the previous 20 tax years. Once someone meets this 10/20 years test, they are treated similarly to a UK domiciled person for IHT – i.e. they’re subject to IHT on their worldwide estate, not just UK assets.

An LTR is exposed to IHT on all assets worldwide (foreign and UK). By contrast, someone who is not an LTR (and not UK domiciled) remains liable only on UK assets.

To lose LTR status (and exit worldwide IHT scope), an individual must spend a long period non-resident. Generally, it takes 10 consecutive tax years outside the UK to fully shed LTR status once acquired. In other words, if you become an LTR, you continue to be treated as UK-domiciled for IHT for up to a decade after leaving the UK. Brief periods abroad won’t  reset a client’s status; it requires a substantial absence to escape the UK IHT net once you’re caught by it.

IHT treatment of trusts after April 2025

Under the new regime, the excluded property status of trust assets is no longer a fixed characteristic determined at settlement. Instead, it can change over time depending on the settlor’s current status as an LTR or not. In essence, a trust can dip in and out of excluded property treatment as the settlor’s circumstances evolve.

Here is how trusts are affected:

If the Settlor is not an LTR at the time of the IHT event (e.g. a 10^th anniversary) The trust’s foreign assets remain excluded property, just as before. If the settlor never becomes an LTR, the trust can potentially remain an EPT indefinitely under the new rules.

If the Settlor is an LTR, the trust loses its full excluded property status. From that point forward, the trust’s foreign assets are brought within the IHT regime for as long as the settlor remains an LTR. In practice, this means the trust becomes subject to the relevant property charges – namely 10 year periodic and exit charges. Prior to 2025, foreign assets in an EPT would never face this charge; now they will if the settlor is an LTR at the decade point.

If the Settlor dies as an LTR, a major point is whether the trust is “settlor-interested.” meaning the settlor can benefit from it. Under the new rules, the trust assets will be treated as part of the settlor’s estate on death, taxed at 40% IHT.

There is an important transitional exception. If the trust was settled (and funded) before 30 October 2024 (date of 2024 Autumn Budget) and no additional funds were added later, then even if the settlor is an LTR, the trust’s foreign assets are not dragged into the settlor's estate under the GWR rules. Without that protection, a settlor-interested trust where the settlor didn’t exclude themself as a beneficiary could see a 40% charge on the entire trust on the settlor’s death, in addition to the periodic/exit charges that applied during the settlor’s lifetime.

The new rules acknowledge that a settlor’s status can change more than once. This is a complex aspect!

Note that UK assets in a trust were always subject to IHT and remain so. The changes essentially  affect what happens to non-UK assets in trusts linked to long-term UK residents. The result is that many trusts set up by non-doms, which previously would have been entirely outside UK IHT, will now face a series of UK tax charges if the settlor has made the UK their long-term home.

Transitional provisions and grandfathering (Post-2025)

To ease the impact on trusts created under the old rules, FA 2025 includes transitional provisions for existing EPTs:

Grandfathering Date – Trusts that were established and funded before 30 Oct 2024 (Autumn Budget 2024) receive special treatment. In these legacy trusts, if the settlor becomes an LTR, the trust’s foreign assets will not be subject to the GWR rules that pull assets into the settlor’s estate. In plain terms, the settlor can still be a beneficiary of a pre 30/10/24 trust without causing the trust assets to be taxed at 40% on their death. This protects such trusts from a double tax hit (periodic charges and estate tax) and was intended to honour the expectations under which they were created. However, this grandfathering has limits: it does not exempt the trust from 10-year and exit charges once the settlor is an LTR. Those charges will apply going forward, even for old trusts. The relief mainly ensures that the trust isn’t taxed again at 40% on the settlor’s death, which is a significant preservation of benefit for older trusts.

Trusts settled on or after 30 October 2024, or any new assets added to an existing trust after that date, do not enjoy the above exemption. If such a trust’s settlor becomes an LTR and has not renounced all benefit, the trust assets will be included in the settlor’s estate on death (if settlor is still an LTR then). To avoid this, settlors must be excluded as trust beneficiaries before they become long-term residents. A difficult choice; give up any personal benefit from the trust in order to safeguard the inheritance for the next generation.

If the settlor of an EPT died before 6 April 2025, the trust’s excluded property status is judged by the old rules (domicile at settlement) and can continue indefinitely under the old regime. In other words, if a non-dom settlor had died while the trust was an EPT, the trust doesn’t suddenly lose excluded status because of the new law. Similarly, if a settlor passes away before becoming an LTR (but after the law change), and was not an LTR at death, the trust remains excluded property going forward. On the other hand, if a settlor dies after April 2025 as an LTR, that death triggers estate inclusion for trusts without grandfathering.

FA 2025 impact on Beneficiaries, settlors and trustees 

Beneficiaries themselves don’t pay IHT (it’s the trust or estate that is taxed), but the value they ultimately receive can be significantly impacted. New periodic charges will gradually erode the value of trust assets over time.

If a trust falls foul of the settlor-interested rule (and isn’t grandfathered), the beneficiaries might see the trust taxed as part of the settlor’s estate on death – a one-time 40% charge that could significantly shrink the trust. Under the old regime, beneficiaries expected the trust to bypass any such death charge; now that certainty is gone unless steps are taken to avoid it.

Trustees might now change how they manage or distribute the trust. They might choose to distribute more assets earlier (to avoid large periodic charges on a growing fund), or conversely, hold onto assets if a settlor is close to losing LTR status (to avoid an exit charge). They may also decide to exclude the settlor as beneficiary.

Settlors and trustees should review all EPTs established under the old rules.

The original assumption that foreign assets in these trusts would never be taxed in the UK may no longer hold if the settlor has become or will become an LTR. Trustees should identify which trusts are affected (e.g. trusts where the settlor is already UK resident for 10 years or more, or planning to be). The review should check the trust’s establishment date, funding history, and terms. Some trusts might still achieve their purpose (e.g. if the settlor will permanently remain non-UK resident or die before becoming LTR), but many will not. In some cases, the family may decide a trust no longer serves its intended purpose of IHT avoidance; other benefits of the trust (asset protection, control) would need to be weighed against the new tax costs.

Trustees will face a heavier administrative burden. They must now monitor the settlor’s UK residency status on an ongoing basis. For any year in which a 10-year anniversary arrives or a distribution is made, the trustee needs to know whether the settlor is an LTR that year (or was recently an LTR, in case of exit). Trust record-keeping must be robust: for example, accurately noting periods when assets were excluded vs chargeable to correctly compute pro-rated charges. This likely means higher professional fee and more diligence to avoid penalties.

The financial impact on trusts can be significant. Trusts that fall into the relevant property regime will need to pay IHT periodically. This may necessitate keeping liquid funds or selling assets to fund the tax. Trustees might plan distributions just before charges crystallise. Timing must consider settlor’s status.

The possibility of trusts moving in and out of IHT scope introduces complexity. For instance, a settlor who becomes LTR at year 11 will subject the trust to charges, but if they leave the UK in year 12 and stay away, the trust might exit the regime with a tax charge, then be free of UK tax for a while – unless the settlor returns! Each such transition needs managing. Predicting future residency is now a key part of trust planning, which is inherently uncertain – people’s plans change, and life events intervene.

Potential strategies for settlors and trustees of EPTs

Exclude the Settlor as a Beneficiary.

For trusts that are not grandfathered (and even as a precaution for those that are), a recommendation is to formally remove the settlor (and their spouse) from the list of beneficiaries before the settlor becomes an LTR. By doing so, even if the settlor turns into a long-term UK resident, the trust assets should not count as part of their estate on death (since the settlor has no remaining interest). It effectively neutralises the GWR issue. The downside is the settlor gives up any personal benefit from the trust – but in many cases settlors set up these trusts for their heirs anyway. This move preserves the inheritance for the next generation without a 40% drain at the settlor’s death. It’s particularly crucial for any trust that has been funded post-October 2024, because those have no grandfathering on GWR at all.

Avoid mixing new contributions into an old trust that is grandfathered.

New additions could taint the trust or be separately trackable but subject to new rules. If a settlor wants to add assets, consider establishing a new trust for those (recognising it won’t have grandfathering). Keeping pre-2024 trusts “clean” helps ensure they keep their exempt status for estate inclusion. Also, consider carefully any new trusts. If the settlor expects to stay in the UK long, a new trust will inevitably face the charges; is it still worth creating?

In some circumstances, it may be wise to dismantle or restructure the trust

. For example, if a settlor is already an LTR and the trust is now fully taxable, the original reason for the offshore trust (IHT savings) is gone. Trustees might consider distributing assets to beneficiaries now, especially if those beneficiaries are not UK residents or have their own planning opportunities. Each approach has tax consequences. An immediate distribution while the settlor is LTR will incur an exit charge, but that might be acceptable if it avoids future 6% and 40% hits.

Some settlors may plan their time in the UK to avoid ever becoming an LTR.

For instance, an individual could leave the UK after 9 years of residence to stop the clock (especially if their intention was not to settle permanently). Moving countries for tax is though not feasible for everyone. On the flip side, if someone already is an LTR, they might decide to emigrate for 10+ years (perhaps in retirement) to escape UK IHT on their trust going forward – essentially “reset the clock” so the trust can become excluded property again. Need to consider though other countries’ tax regimes (plus the new exit charge on leaving, which is a cost to doing so).

The IHT rules for non-doms have changed before and could change again so review plans regularly. An annual check-in reviewing the settlor’s residency status, any law changes, and the trust’s tax position would be a prudent habit.

And finally...

The Finance Act 2025 has transformed the IHT treatment of EPTs. The shelter of an offshore trust for a UK resident non-dom is no longer reliable – it now has an expiry date if the individual remains resident here. Long-term UK residents will pay IHT on worldwide assets, and their trusts will bear UK tax charges, aligning the UK with international norms of taxation based on residence.