ASK MAT- Is it true that to manage UK IHT exposure, Trustees must be able to confirm the residence status of settlors on an ongoing basis

ASK MAT- Is it true that to manage UK IHT exposure, Trustees must be able to confirm the residence status of settlors on an ongoing basis

Mat says the provided statement—"To manage UK IHT exposure, Trustees must be able to confirm the residence status of settlors on an ongoing basis"—accurately reflects UK Inheritance Tax (IHT) requirements, particularly under the residence-based regime introduced from 6 April 2025.

• This regime replaces the previous domicile-based system with a focus on long-term UK residency (LTR), defined as being UK tax resident for at least 10 out of the last 20 tax years.
• The settlor's residence status directly influences whether trust assets (especially non-UK assets in foreign or offshore trusts) qualify as "excluded property," which is exempt from IHT, or become liable for charges.
• Assets settled by a non-LTR settlor are generally excluded, but if the settlor becomes an LTR, the trust's IHT exposure increases, including on events like the settlor's death, asset transfers, 10-year anniversaries, or exits from the trust.
• Ongoing monitoring is essential because residence status is dynamic, determined by the Statutory Residence Test, and can change due to factors like time spent in the UK or ties to the country.

In understanding the above changes, you must understand  the Risks to the trust and its trustees

Failure to confirm the settlor's residence status on an ongoing basis can expose the trust and its trustees to significant financial and compliance risks, especially under the post-2025 rules, where all foreign trusts lose automatic protected status. Key risks include:

• Unexpected Tax Liabilities: If the settlor becomes an LTR, non-UK trust assets may no longer qualify as excluded property, triggering IHT on worldwide assets at rates up to 40% (e.g., on the settlor's death if they remain a beneficiary) or relevant property charges of up to 6% on 10-year anniversaries and exits. This could result in substantial, unplanned tax bills.
• Exit Charges and Transitional Issues: When a settlor ceases to be an LTR, assets becoming excluded property may incur an exit charge (pro-rated up to 6%), and poor timing under transitional rules (e.g., delaying non-residence from 2025/26) could extend the IHT "tail" period by up to seven years, prolonging exposure.
• Non-Compliance and Penalties: Incorrect asset classification or failure to report chargeable events (via forms like IHT100) within deadlines (e.g., six months after the event) can lead to HMRC penalties, interest, and audits. Trusts may also face ongoing charges if the settlor's status change is not documented at key points, such as transfers or deaths.
• Impact on Beneficiaries and Trust Integrity: Without monitoring, trustees risk making decisions that harm beneficiaries, such as missing opportunities to mitigate charges through gifts with reservation of benefit or qualifying interest in possession trusts. In some cases, the life tenant beneficiary's status may also need to be tracked, adding complexity.

Overall, these risks

• Are heightened for trusts settled before 30 October 2024, which avoid certain 40% charges but remain vulnerable to other IHT exposures if status changes go unnoticed.

Suitable Advice to the Trustee

• To effectively manage UK IHT exposure, trustees should adopt a proactive, systematic approach to monitoring and compliance.

Recommended steps include:

• Establish Ongoing Monitoring Protocols: Use the Statutory Residence Test to annually audit and document the settlor's UK tax residence status, including tracking years of residency over the rolling 20-year period. Set up alerts for potential changes, such as planned moves or increased UK ties, and extend monitoring to life tenant beneficiaries where relevant for certain trust types.
• Maintain Accurate Records: Record the settlor's status at critical junctures (e.g., settlement date, chargeable events, or death) to ensure proper asset classification. This helps calculate IHT thresholds and charges accurately using HMRC tools or worksheets.
• Seek Professional Guidance: Engage UK tax advisors or legal experts specialising in IHT and trusts to review existing arrangements, assess impacts of the 2025 rules, and advise on restructuring (e.g., to mitigate exit charges). This is crucial for complex scenarios, such as foreign trusts or transitional provisions.
• Ensure HMRC Compliance: Register the trust with HMRC's Trust Registration Service if liable for UK taxes, and submit forms like IHT100 for reportable events. Plan for funding potential charges to avoid liquidity issues.
• Review and Plan Strategically: Periodically evaluate the trust's structure for IHT efficiency, considering options like planning for settlor status changes to minimise charges and protect beneficiary interests.

By implementing these measures, trustees can minimise risks and ensure the trust remains compliant and tax-efficient.

Sources with Weblinks

1. The scope of inheritance tax: a new residence-based system - https://www.taxadvisermagazine.com/article/scope-inheritance-tax-new-residence-based-system
2. Major changes to UK Inheritance Tax: the move to a residence ... - https://haysmac.com/insights/major-changes-to-uk-inheritance-tax-the-move-to-a-residence-based-regime-from-april-2025/
3. UK inheritance tax reporting: a post-2025 checklist for non-UK trustees - https://www.farrer.co.uk/news-and-insights/uk-inheritance-tax-reporting-a-post-2025-checklist-for-non-uk-trustees/
4. Taxation of offshore trusts - Saffery - https://www.saffery.com/insights/articles/taxation-of-offshore-trusts/
5. UK Inheritance Tax: Long-Term Residence - Boodle Hatfield - https://www.boodlehatfield.com/articles/long-term-residence-and-its-importance-for-uk-inheritance-tax-iht-purposes
6. Excluded Property Trusts and the 2025 Inheritance Tax Reform - https://www.williamsoncroft.co.uk/excluded-property-trusts-and-the-2025-inheritance-tax-reform-what-uk-non-doms-need-to-know/
7. Trusts and Inheritance Tax - GOV.UK - https://www.gov.uk/guidance/trusts-and-inheritance-tax
8. A new world for Inheritance Tax | KPMG UK - https://kpmg.com/uk/en/insights/tax/tmd-a-new-world-for-inheritance-tax.html
9. https://daysium.com/modernising-trust-compliance