Taxation of foreign trusts: A UK perspective for international advisors

A trust is a recognised structure in UK law, such that it is its own tax-paying person with requirements to pay income tax, capital gains tax (CGT), and possible inheritance tax (IHT) exposure depending on the nature of the structure. 

As a taxable person, the trust can be tax resident in the UK or outside. This is determined under UK law by virtue of the tax residence position of the trustees. Where the trust is non-UK resident, non-UK source income and gains are not within the scope of UK taxes. Under UK rules, these sources can be attributed to UK resident beneficiaries to pay tax on, if the trust itself is not incurring the tax charge. 

This can result in a favourable tax outcome or significantly inflated tax charges compared to what the trust would usually pay, depending on the beneficiaries’ personal tax position. This can be particularly advantageous when applied alongside the Foreign Income and Gains (FIG) regime which was introduced for qualifying new residents effective 06 April 2025. Users of the FIG regime can exempt non-UK income and gains from UK tax provided they disclose the source and apply a specific exemption under the regime. 

Trust distributions can benefit from exemption under the FIG regime if the individual qualifies and elects in. This can provide a valuable means of extracting funds from an offshore trust for qualifying individuals. 

Conversely, the UK has moved to a residence-based system in determining exposure to IHT. Where a trust is associated with a living settlor who has taken up residence in the UK, the trust itself could become subject to IHT regardless of whether the settlor was non-UK resident and/or domiciled at the time of formation. 

After 10 years of consecutive UK tax residency, an individual becomes a long-term UK resident (LTUKR). This means their worldwide estate falls within the scope of IHT. Importantly, any exemptions under the limited IHT treaties already in place are not necessarily affected by this change in scope. 

When a trust is created by a living settlor, its LTUKR status is not fixed based on the facts at formation. Should a living settlor subsequently become a LTUKR, regardless of when the trust was created the trust will also become LTUKR. This may bring the trust within the scope of the relevant property regime such that periodic IHT (up to 6%), and exit IHT charges may be levied. 

Trusts with deceased settlors are not subject to possible entry and exit of the relevant property regime, which may make the UK more attractive for beneficiaries of older trusts. 

The interaction of the new rules means that a temporary relocation to the UK could provide a favourable tax regime for extracting trust funds. This is not to be outweighed by the risk of significantly increased tax costs should the trust become LTUKR.

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Nikki Martin is a chartered tax adviser in the international tax team at Carpenter Box. She advises internationally mobile and high-net-worth clients on residency, domicile, global mobility, inheritance tax, trusts, and family investment structures.