Changes to excluded property trusts in 2025: a paradigm shift in UK inheritance taxation

The UK Government’s decision to reform the Inheritance Tax (IHT) regime, specifically by altering the treatment of Excluded Property Trusts (EPTs) based on the settlor's residence rather than domicile, represents a fundamental transformation in wealth planning for UK-resident non-domiciled individuals (non-doms). Effective from 6 April 2025, these changes - based on existing draft legislation - warrant careful consideration by settlors, trustees and their advisors.

1. The evolution of excluded property trusts

Historically, the UK’s IHT system has primarily centered on an individual's domicile status rather than their residency. This long-standing framework allowed non-doms to implement strategic planning, such as EPTs, to manage their wealth and mitigate UK tax exposure. Non-doms could create an EPT prior to their becoming UK domiciled and (generally), the EPT would be out of scope for IHT. The fact that a settlor became UK (deemed) domiciled later would not impact the IHT position.

EPTs can play an important role in managing tax exposure for individuals that have historically not viewed the UK as ‘home’. However, with the UK Government shifting focus from domicile to residence as the connecting factor for IHT liability, the effectiveness of these trusts may need to be reassessed.

2. Transitioning to a residence-based IHT system

The 2025 reforms introduce a shift to a residence-based approach to IHT. This shift puts the UK and its approach to taxation on a similar footing to that of several other major economies. A central feature of this shift is the implementation of Long-Term Resident (LTR) status. Several consequences will flow from the Government's change in approach, including:

Individuals classified as LTRs can be subject to IHT on their worldwide assets, regardless of their domicile status.

Pre-existing EPTs will no longer guarantee IHT exemption for non-UK assets if the settlor qualifies as an LTR.

3. Impact of the EPT rule changes

These rule changes alter the classification of EPTs for IHT purposes. The fact that a settlor of an EPT can become LTR, and that it is residence that will determine exposure to IHT, has the following potential consequences:

• If a settlor established an EPT while being a non-dom, and is not LTR on 6 April 2025 nor later becomes a LTR, then the trust’s status as an EPT will remain unaltered
  
  
• If a settlor established an EPT while being a non-dom, and subsequently becomes classed as a LTR from 6 April 2025 or later, the EPT will come within the scope of IHT for some purposes, meaning periodic and exit charges to IHT will begin to apply
  
  
• If the trust qualifies as a settlor-interested trust (EPT or otherwise) - where the settlor may benefit from the trust fund - and the settlor becomes LTR on or after 6 April 2025 the trust fund may be included in the settlor’s estate upon death, if there have been additions made to the trust on or after 30 October 2024. That could result in the trust fund being subject to IHT at a rate of 40%, in addition to periodic and exit charges now applying during the lifetime of the trust
  
  
• To the extent that the LTR status of a settlor (on in some cases, life tenant) of an EPT or trust comprising non-UK property changes, the trust may move in and out of the UK IHT regime. This may mean charges to IHT at the dates of those shifts in status of the settlor / life tenant.

Great care will be needed when considering the tax treatment of EPTs and settlements more generally following the implementation of the April 2025 reforms. The precise terms of the trust e.g., whether it is discretionary in nature, or created a ‘Qualifying Interest in Possession’, what it holds, when it was established and who by, among many other things, will need to be considered before there can be clarity on the consequences that will flow from these legislative changes.

4. Reassessing EPTs post April 2025

The upcoming reforms require both settlors, trustees and their advisors to reconsider existing wealth structures. Key considerations include:

• Trust Structure Review: Trusts established before 6 April 2025 should be reviewed to establish if they will be able to achieve the objective which led to their creation
  
  
• Residency Planning: Settlors at risk of becoming LTR, and their advisors, need to review movements and understand the potential consequences, ideally before any shift in LTR status
  
  
• Trustee Duties: Trustees must understand the potential change in their compliance obligations so far as UK tax is concerned.

Navigating the New Era for EPTs

The 2025 IHT reforms introduce a significant change in how existing non-doms, and those who advise them, must approach tax and financial planning. To navigate this transition effectively, existing EPT structures should be reassessed, other means to manage wealth investigated and there should be pro-active engagement with suitably qualified advisors to understand the options available.