Non-resident trusts can be powerful tools in international tax and estate planning. These types of trusts, established by individuals who do not reside in the UK, hold assets outside the UK and are managed by trustees who are also non-residents.
The significance of non-resident trusts has grown in recent years as high-net-worth individuals and international investors seek efficient ways to manage and protect their wealth across borders.
This interest is driven by the benefits offered by non-resident trusts, such as asset protection, tax optimisation, and confidentiality. They are particularly attractive for expatriates and international investors with assets in the UK, as they can provide a structured way to manage these assets while potentially reducing tax liabilities.
In this article, we’ll look at the formation, management, and tax implications of non-resident trusts. We’ll also explore the benefits and challenges associated with these trusts.
Table of Contents
- What is a non-resident trust?
- What does domicile mean?
- How do you set up a non-resident trust?
- How much income tax do trustees of a non-resident trust have to pay?
- How to declare UK income for non-resident trusts
- How much income tax do you have to pay if you are the settlor of a non-resident trust?
- How much income tax should you pay if you are a beneficiary of a non-resident trust?
- Do you have to pay Capital Gains Tax for non-resident trusts?
- Does inheritance tax apply to non-resident trusts?
- Key changes affecting non-resident trusts from April 2025
- Conclusion
What is a non-resident trust?
A non-resident trust is a special type of trust where:
None of the trustees (the people who take care of the assets on behalf of beneficiaries) are not based in the UK for tax purposes; or
Only some of the trustees are residents in the UK and the person who set up the trust (the settlor) wasn’t living in the UK when they created it or added funds to it; or
Only some of the trustees are resident in the UK and the settlor of the trust was not domiciled or deemed domiciled in the UK when the trust was set up or funds were added.
What does domicile mean?
Domicile is the place you consider your true home, even if you’re currently living somewhere else.
You can only have one domicile at a time. For example, you might live and work in the UK, but if you plan to eventually return and live permanently in another country, that other country could be your domicile.
There are specific rules about where you live and where your permanent home (domicile) is considered to be and these rules affect how trusts are taxed.
How do you set up a non-resident trust?
You set up a non-resident trust in much the same way you set up any kind of trust. This involves:
Choosing the appropriate type of trust (e.g. discretionary trust);
Appointing trustees;
Drafting the trust deed;
Transferring assets to the trust;
If it is not liable for UK taxes, you must still register the trust unless:
Your trust holds money or assets from a UK-registered pension scheme, like an occupational pension scheme;
Your trust holds life or retirement policies and the policy only pays out on events like death, critical illness, or permanent disablement, or for healthcare costs;
Your trust holds benefits from an insurance policy that is paid out after someone dies as long as the benefits are distributed within 2 years of the death;
The trust is a charitable trust that is registered as a charity or not required to register as a charity;
It is a pilot trust set up before 6th October 2020 and holding no more than £100;
The trust holds shares of property or assets jointly owned by two or more people as tenants in common;
The trust is created by a will that comes into effect upon someone’s death;
The trust is for bereaved children under 18, or adults aged 18 to 15, set up under a parent’s will (or intestacy), or the Criminal Injuries Compensation Scheme;
The trust was created during professional services or business transactions to hold client money or assets.
How much income tax do trustees of a non-resident trust have to pay?
As a trustee of a non-resident trust, you only pay UK tax on income that comes from UK sources.
For discretionary or accumulation trusts trustees pay tax at:
39.35% on dividend income from UK stocks and shares;
45% on UK interest
45% on all other types of non-dividend income arising in the UK.
For interest in possession trusts, trustees pay tax at:
87.5% on trust dividend income;
20% on all other types of income.
That being said, there are specific amounts of income that trusts can receive before they start paying tax. These tax-free thresholds vary, so it’s essential to check the current limits.
How to declare UK income for non-resident trusts
If you’re managing a non-resident trust with UK source income, you must declare this income to HMRC using the appropriate forms.
SA900 Trust and Estate Tax Return is used to declare any UK source income that the trust receives. You might also need to complete the SA906 supplementary pages to provide additional information.
Information you may need to complete the forms includes all relevant details about the UK source income received by the trust including dividends, interest, rent, or any other income originating from the UK.
How much income tax do you have to pay if you are the settlor of a non-resident trust?
If you are settlor of a non-resident trust, you need to pay tax on the trust’s income as if it’s your own or if you or your spouse/civil partner can benefit from it. That being said, you won’t be taxed twice on the same income if trustees have already paid tax on it.
If the trust’s beneficiaries include your unmarried children under 18, you may also need to pay tax on their income, but you can claim relief on this if the trustees are non-residents under Extra Statutory Concession A93.
How much income tax should you pay if you are a beneficiary of a non-resident trust?
If you are a UK resident beneficiary of a non-resident trust and you receive income from it, you may need to complete a Self Assessment tax return and fill out the SA107 supplementary pages, which are specifically for reporting trust income.
However, you can get tax relief if trustees have already paid tax on that income.
Non-resident beneficiaries only need to include UK source income on their tax return.
Do you have to pay Capital Gains Tax for non-resident trusts?
Generally, trustees of non-resident trusts do not pay UK Capital Gains Tax. Instead, the responsibility to pay tax on the gains made by the non-resident trust falls on the person who set up the trust or the beneficiaries.
That being said, special rules apply for disposing of UK property or land. This means if you are a trustee of a non-resident trust and you dispose of UK property or land, you may be liable to pay Capital Gains Tax. The Capital Gains Tax rate for non-resident trustees is the same for resident trustees.
Trustees can also benefit from the annual exempt amount, which is the tax-free allowance for Capital Gains Tax.
Does inheritance tax apply to non-resident trusts?
If the person who put assets into the trust was domiciled or deemed domiciled in the UK when the assets were transferred into the trust, inheritance tax applies to all assets regardless of their location.
If the settlor was not domiciled in the UK at the time the assets were put into the trust, inheritance tax is only due on assets located in the UK.
Trigger events for inheritance tax include:
When assets are first transferred into the trust;
The tenth anniversary of the creation of the trust and every ten years thereafter;
When assets are distributed from the trust or it is wound up.
Trustees are primarily responsible for making sure any inheritance tax due is calculated are paid, regardless of whether they are UK residents.
Beneficiaries of a non-resident trust should also be aware that the distribution of assets might incur inheritance tax, affecting the amount they ultimately receive.
Key changes affecting non-resident trusts from April 2025
From April 6th 2025, the current income tax and Capital Gains Tax protections for non-resident trusts will end. This means that non-resident settlors will be taxed similarly to UK domiciled settlors.
Gains realised by the trust will be chargeable to the settlor unless the settlor and their dependents are excluded from any benefits, which is rare.
These upcoming changes will affect:
Foreign-domiciled individuals who are UK resident
Individuals who have been UK tax residents for less than four years by 6th April 2025;
Those who have previously been UK residents but have since left the UK.
Trusts with no living or UK resident settlors will remain largely unaffected, though beneficiaries who have been UK residents for more than four tax years will no longer be able to claim the remittance basis on trust benefits after April 2025.
Beneficiaries on the remittance basis with unmatched capital payments may also need to reassess their positions before the changes take effect if a beneficiary has received an unmatched capital payment abroad, and the trust is not within TCGA 1992 s82, future gains could be taxed when realised after 2025.
Conclusion
Non-resident trusts offer many benefits, especially to high-net-worth individuals and international investors with assets in the UK.
However, significant changes coming into effect in April 2025 which will impact the tax treatment of non-resident trusts make getting expert advice regarding these kinds of trusts of the utmost importance.
At Lawhive, our network of specialist wills, trust, and probate lawyers can provide affordable, personalised guidance on managing and setting up non-resident trusts, ensuring compliance with tax laws.
Schedule a free case evaluation with our legal assessment team today and receive a no-obligation quote for the services of a specialist lawyer.