A major overhaul of the UK’s Inheritance Tax (IHT) regime is set to take effect from 6 April 2025, with significant consequences for non-UK domiciled individuals (non-doms) who have established or benefit from Excluded Property Trusts (EPTs). The forthcoming reforms mark a clear shift from a domicile-based system to one rooted in residence, bringing the UK more in line with the tax frameworks of countries such as the United States.

This transformation, introduced via the Finance Act 2025, could dramatically change how offshore trusts are treated for IHT purposes. If you are a settlor, trustee, or advisor, now is the time to assess the impact these changes will have on your planning and compliance responsibilities.

Understanding the Current Position: Why EPTs Have Been So Effective

Under the current UK IHT regime, non-domiciled individuals can establish EPTs to keep non-UK assets outside the scope of UK inheritance tax—even if they later become UK domiciled or deemed domiciled. This planning has been especially popular with internationally mobile families who do not regard the UK as their permanent home.

An EPT allows individuals to ring-fence non-UK assets from IHT exposure provided the trust was set up while the settlor was non-UK domiciled and no UK property is added later. Once formed, the trust could remain IHT-exempt, even after the settlor becomes UK domiciled.

This is set to change.

What’s Changing in April 2025?

From 6 April 2025, the UK will assess IHT exposure based on residence history, rather than domicile. A new category of taxpayer known as the Long-Term Resident (LTR) will be introduced.

Individuals who have been UK tax resident for at least 10 of the previous 20 tax years will be treated as LTRs. Once someone becomes an LTR, their worldwide estate becomes subject to UK IHT, regardless of their domicile status. This also means that trusts they have created, including EPTs, may no longer benefit from IHT protection.

This shift marks a profound change in how UK tax interacts with offshore structures.

The Impact on Existing Excluded Property Trusts

The reform will fundamentally alter how EPTs are treated for IHT purposes. The residence status of the settlor becomes the key factor in determining whether the trust remains outside the UK IHT net.

Key scenarios to consider:

1. Settlor does not become an LTR
If the settlor never meets the LTR threshold, their EPT should continue to be treated as excluded property, and non-UK assets within the trust should remain outside the scope of IHT.

2. Settlor becomes an LTR on or after 6 April 2025
If the settlor is classified as an LTR, the trust could become subject to:

  • 10-year periodic charges
  • Exit charges on capital leaving the trust
  • Potential inclusion of the trust’s assets in the settlor’s estate on death (if the trust is settlor-interested and there have been additions after 30 October 2024)

3. Trusts receiving additions after 30 October 2024
Where the settlor is or becomes an LTR and is also a potential beneficiary of the trust (i.e., it is a settlor-interested trust), any additions made to the trust on or after 30 October 2024 may bring the entire trust fund into their taxable estate for IHT purposes on death.

4. Residency status changes over time
A trust may move in and out of the IHT regime depending on the residence status of the settlor (or life tenant, in some cases). These changes could trigger entry and exit charges at each transition point.

These rules introduce significant complexity, and every trust must be reviewed in context. The nature of the trust (e.g. discretionary or interest in possession), the origin of the assets, and the settlor’s long-term plans will all influence the tax outcome.

Steps Settlors and Trustees Should Be Taking Now

With the new rules fast approaching, trustees, settlors, and their advisors should act now to prepare for the post-April 2025 regime.

1. Comprehensive Trust Review
Every trust established by a non-dom should be reviewed to determine:

  • Whether it will still achieve its original tax objectives
  • Whether additions were made or are planned after 30 October 2024
  • Whether the settlor or any beneficiaries will become UK long-term residents

2. Residency Forecasting
Understanding the residence trajectory of the settlor is essential. Individuals approaching the 10-year UK residency threshold may consider adjusting future residency plans to prevent becoming classified as an LTR.

3. Trustee Responsibilities
Trustees must ensure they understand how their reporting and tax obligations may change. This could include registering the trust in the UK, calculating IHT charges, and engaging UK tax advisors more closely.

What this Means for Future Planning

The effectiveness of EPTs and similar offshore arrangements is no longer guaranteed. These reforms may render previously sound strategies ineffective or inefficient from a tax perspective.

Clients with existing EPTs may need to consider:

  • Whether continuing to hold the trust is worthwhile
  • Whether changes in trust structure are advisable
  • Whether alternative wealth structuring methods are more appropriate under the new rules

Additionally, individuals who were considering setting up new trusts should proceed with caution and ensure that any planning is aligned with the 2025 regime.

The Time to Act is Now

These reforms will fundamentally reshape how trusts are treated under the UK tax system. The combination of a residence-based test for IHT, the introduction of Long-Term Resident status, and the erosion of protections for EPTs demand proactive planning and tailored advice.

At Williamson & Croft, we specialise in advising internationally mobile individuals, families, and trustees on complex UK tax matters. Our team can:

  • Review and assess the status of existing EPTs
  • Advise on potential IHT exposure and how to manage it
  • Help you navigate the transition to a residence-based IHT system
  • Design effective, compliant, and future-proof wealth planning strategies

Book a consultation today to discuss your current position and how best to respond to the changes. Early action can preserve wealth, avoid unnecessary tax exposure, and provide peace of mind in uncertain times.