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Excluded Property Trusts – is your trust fit for purpose under the 2025 IHT Regime?

Katriona McEwan · Posted on: September 10th 2025 · read

Let’s start from the beginning

Prior to the 6 April 2025 reforms, the UK Inheritance Tax (IHT) regime was fundamentally domicile-based. Non-UK domiciled (nor deemed domiciled) individuals were subject to IHT only on UK situs assets (and assets which derive value from UK residential property).

The term Excluded Property Tax (EPT) is generally used to describe a trust created by a non-UK domiciled settlor resulting in the trust’s non-UK assets being excluded from liability to UK Inheritance Tax (IHT) under s48(3)(a) IHTA 1984.

Crucially, once assets were settled into an EPT while the settlor was non-UK domiciled, they retained excluded status if the settlor later became UK domiciled or deemed domiciled, even if the settlor was also a beneficiary of the trust.

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This permanence made EPTs a cornerstone of IHT planning for non-domiciled individuals, particularly those approaching the 15-year deemed domicile threshold.

Death of the settlor before 6 April 2025

If the settlor died before 6 April 2025, the trust’s IHT status is fixed based on the settlor’s domicile at the time the property became comprised in the settlement. This means:

The trust continues to benefit from the excluded property treatment.

The settlor’s subsequent change in domicile or residence is irrelevant.

Periodic and exit charges do not apply to non-UK assets in the trust.

What’s changed from 6 April 2025?

From 6 April 2025, the UK moved to a residence-based IHT regime, aligning with global norms and removing domicile as the connecting factor.

Now, Long-Term UK Residents (LTR) will be liable to UK IHT on their worldwide assets and someone who is not a LTR will be liable to UK IHT on UK situs assets only (and non-UK assets which derive value from UK residential property).

A LTR is defined as someone who has been UK tax resident in 10 out of the previous 20 tax years. Once LTR status is acquired, it persists for up to 10 years after leaving the UK, depending on prior residence duration.

EPT status now depends on the settlor’s LTR status, and the status is no longer fixed at the time the trust is established but instead changes as and when the settlor’s LTR status changes and IHT exposure will depend on what the settlor’s status is at the time of the chargeable event.

This applies to trusts created both before and after 5th April 2025, provided the settlor was still alive post 5th April 2025.

Under new IHT rules, trustees and settlors now face a more complex and dynamic framework with new risks and responsibilities.

Katriona McEwan Tax Director

This introduces dynamic exposure to IHT, with trusts potentially moving in and out of charge to UK IHT depending on the settlor’s residence status.

The settlor’s LTR status on death post 5 April 2025 will then ‘cement’ the Trust’s IHT status for future chargeable events as the LTR status at death.

Non-EPTs within the Relevant Property Regime are liable to UK IHT on each ten-year anniversary of the trust (principal charge) and when assets in the trust cease to be relevant property, i.e. when property is appointed to a beneficiary absolutely (exit charge).

It is now also possible for an IHT charge to arise when the LTR status of the settlor changes.

While the Settlor is not LTR the non-UK assets of the trust are excluded from UK IHT, but when/if the settlor becomes LTR the non-UK assets cease to be excluded property and will be liable to IHT on the next ten-year charge and/or an exit.

If a Settlor ceases to be LTR the non-UK assets will become excluded property again. An exit charge will apply as a result which has not previously been something trustees needed to think about.

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Is Your Trust Approaching A 10 Year Charge?

Katriona McEwan Tax Director

The 6 April 2025 cliff edge

If a trust that was previously not excluded property prior to the 6 April 2025 but became excluded on that date because the settlor is not LTR, then an immediate charge to IHT would arise on that date.

This would be reportable to HMRC by 31 October 2025 and any tax due payable at the same time.

Conversely, a trust that was previously an EPT will fall within the UK relevant property regime from the 6 April 2025 if the settlor is a LTR at the point of any future chargeable event (including the settlor ceasing to be LTR).

The tax charged on such an event would be pro-rated from 6 April 2025, or such later date as the settlor becomes LTR and the assets come within the relevant property regime.

Trustees will need to consider the residence status of the settlor at 5 April 2025 and on all future chargeable events, and they will need to keep track if they are going to lose LTR status, to determine the scope of IHT applicable to the trust assets.

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Transitional Protections and GROB Rules

In addition to the above, the reforms included transitional reliefs in regard to the Gifts with Reservation of Benefit (GRoB) rules.

The GRoB rules apply when someone has given away an asset but continues to benefit from this, such as retaining the income from shares given away, or keeping a painting on your walls after giving it to someone else. When this happens, the value of the asset is deemed to remain in the donor’s estate for IHT.

Being a beneficiary of a settlement, even just a potential beneficiary – i.e. not specifically excluded from benefitting, constitutes a reservation of benefit by the settlor.

However, prior to 6 April 2025 when a non-domiciled settlor established an EPT they could remain a beneficiary of the settlement, reserving a benefit in the assets settled, but the GRoB rules would not bite, and the value of the assets would stay outside the scope of UK IHT even after the settlor became deemed domiciled in the UK.

"With domicile removed as the connecting factor and long-term UK residence (LTR) now determining IHT exposure, there are key actions that trustees should consider."

Katriona McEwan, Tax Director

From 6 April 2025, EPTs settled and fully funded before 30 October 2024 will retain exemption from the GROB rules even if the settlor is or becomes LTR. They do not escape periodic and exit charges as noted above - they do however avoid double taxation both within the trust regime and in the settlor’s estate.

EPTs settled on or after 30 October 2024 will not retain the GROB exemption unless the settlor is excluded as a beneficiary prior to the 6 April 2025 to avoid inclusion in their estate on death.

If they are excluded after 5 April 2025 this would amount to a Potentially Exempt Transfer by the settlor (assuming they are LTR), so no immediate IHT charge would arise, but if they were pass away within seven years of the exclusion the value of the trust fund at the time of exclusion would come in to charge in the settlor’s estate.

Planning considerations for trustees

With domicile removed as the connecting factor and long-term UK residence (LTR) now determining IHT exposure, there are a few actions that trustees should consider taking:

Trustees will now need to check and maintain a record of the settlor’s residence history to determine their LTR status and the Trust’s exposure to UK IHT.
It will be necessary to monitor whether an exit charge is triggered if settlors cease to be LTR post-5 April 2025 and for previously non-EPT consideration of the settlors LTR status on the 6 April 2025 will need to be determined to see if a charge arose on that date.
Consideration should be given to excluding the settlor as a beneficiary of any trust established after 30 October 2024 to mitigate the GROB risk, but bearing in mind the potential charge to IHT as a result of the exclusion.
It may also be appropriate to evaluate whether restructuring or winding up the trust is appropriate to mitigate future IHT charges - but of course tax should not be the main driver in these decisions.

Now is the time to review trust arrangements, assess the settlor’s likely future residence status, and seek professional advice to ensure that your trust remains fit for purpose under the new regime.

Remember: the closer any action is taken to the 5 April 2025, the lower the IHT charge will be, as the assets will not have been relevant property for that long.