The Labour Party manifesto for the 2024 general election contained the following pledge: “We will end the use of offshore trusts to avoid inheritance tax so that everyone who makes their home here in the UK pays their taxes here.”

“Excluded property” is a technical term. It describes assets of certain types which, subject to certain conditions, are effectively outside the charge to Inheritance Tax (IHT). This exclusion applies to assets owned during an individual’s lifetime, or at death, and to assets held in trust - such trusts are commonly known as excluded property trusts.

In the current UK IHT regime excluded property trusts are trusts with a non-UK domiciled settlor holding non-UK assets. (There is no requirement that the trustees be “offshore”.)

Such trusts offer many advantages - no chargeable transfer on establishing the trust, no ten-yearly or exit charges, the settlor can be a beneficiary without falling foul of the ‘reservation of benefit’ provisions.

All this is coming to an end, says Gerry Brown, trust and estate planning consultant at QB Partners.

Rachel Reeves, in her parliamentary statement on public spending on 29 July, announced the publication of a policy paper “Changes to the taxation of non-UK domiciled individuals”.

“The government will therefore remove the outdated concept of domicile status from the tax system and implement a new residence-based regime…”

And in a section of the policy paper devoted to IHT;

“Inheritance tax (IHT) is currently a domicile-based system. The government intends to replace this with a new residence-based system from 6 April 2025.This will affect the scope of property brought into UK IHT for individuals and trusts.”

This was followed by a crystal clear statement of intent;

“The government will end the use of Excluded Property Trusts to keep assets out of the scope of IHT.”

So what will happen to existing excluded property trusts? The position is not clear.

“The government intends to change the way IHT is charged on non-UK assets which are held in such trusts, so that everyone who is in scope of UK IHT pays their taxes here. The government recognises that trusts will already have been established and structured to reflect the current rules, so is considering how these changes can be introduced in a manner that allows for appropriate adjustment of existing trust arrangements, while ensuring that the treatment of all long-term residents of the UK is the same for IHT purposes.”

It seems clear that the government intends to legislate to eliminate the IHT advantages enjoyed by existing trusts - that surely must be the meaning of “ …appropriate adjustment of existing trust arrangements”. In addition the policy objective is to ensure “...that the treatment of all long-term residents of the UK is the same for IHT purposes.”

There will be no formal consultation on the changes to the IHT treatment of trusts. The new rules and details of their application will be published at the time of the forthcoming Budget (30th October). Such new rules will include “transitional arrangements for affected settlors”. Although there is no formal consultation, the government will review stakeholder feedback (on the proposals outlined in Jeremy Hunt’s spring Budget) and will carry out further external engagement on IHT policy design over the summer.

What should advisers be doing? No-one is in a position to give advice until the detailed proposals, possibly supplemented with draft legislation, are published in October. However those clients impacted by these changes, which will certainly include settlors and trustees of excluded property trusts should be informed - in general terms - of the proposed changes.

IHT will remain a source of government revenue and will affect many clients; those clients will need advice and there are many planning strategies which can be considered. The “move” from domicile to residence has closed some tax planning doors but may open others.

Finally, although domicile is being ended as a factor in determining UK tax liability, it still remains important in other branches of law - particularly family law and succession law. It can’t be ignored by planners.

By Gerry Brown, trust and estate planning consultant at QB Partners