How are overseas trusts taxed in the UK?

The tax treatment depends on the settlor's domicile and the trust's residence. Non-UK-resident trusts with non-domiciled settlors may hold foreign income and gains outside the UK tax net. UK-domiciled settlors' overseas trusts are subject to UK tax on worldwide income and gains. The UK tax treatment of overseas trusts depends on several factors: (1) Trust residence — a trust is UK-resident if the majority of trustees are UK resident. A non-UK-resident trust has non-UK-resident trustees. (2) Settlor's domicile — the settlor's domicile determines the tax treatment of the trust: (a) Non-domiciled settlor — a non-UK-resident trust established by a non-domiciled settlor may be able to hold foreign income and gains outside the UK tax net (subject to the April 2025 non-dom reforms and the FIG regime). UK-source income is taxed in the trust. (b) UK-domiciled settlor — a non-UK-resident trust established by a UK-domiciled settlor is subject to UK tax on worldwide income and gains (as if the trust were UK-resident). (3) Anti-avoidance rules — the transfer of assets abroad (TOAA) provisions (ITA 2007, Part 13, Chapter 2) can tax the settlor on trust income if the transfer was to avoid UK tax. The rules are complex and apply where the settlor transfers assets overseas and receives a benefit from the trust. (4) Beneficiaries — beneficiaries receiving distributions from an overseas trust may be subject to income tax, depending on the type of income and the trust's tax position. Distributions of accumulated income are taxed as income, while distributions of capital are generally tax-free. (5) CGT — non-UK-resident trusts are generally not subject to UK CGT on foreign assets, but are subject to UK CGT on UK assets (with potential treaty relief). The April 2025 non-dom reforms have changed some of these rules, particularly for existing non-dom trusts. Relevant legislation: ITA 2007, Part 13, Chapter 2 (transfer of assets abroad); TCGA 1992, Section 86 (CGT on non-resident trusts); Inheritance Tax Act 1984, Part 3 (IHT on trusts). Example: A non-domiciled individual sets up a non-UK-resident trust (trustees in Jersey) with foreign assets. The trust's foreign income and gains are not subject to UK tax (unless the TOAA rules apply). If the settlor becomes deemed domiciled (15 of 20 years of UK residence), the trust may be brought into the UK tax net. Common mistake: Assuming that a non-UK-resident trust is always outside the UK tax net. The settlor's domicile and the anti-avoidance rules can bring the trust within the UK tax net, even if the trustees are overseas.

What are the transfer of assets abroad (TOAA) rules?

The TOAA rules can tax the settlor on trust income if the transfer of assets overseas was to avoid UK tax. The rules target arrangements where the settlor transfers assets to an overseas trust and receives a benefit, ensuring that income is not artificially diverted from the UK. The transfer of assets abroad (TOAA) rules are anti-avoidance provisions that can tax the settlor on the income of an overseas trust. Key features: (1) The transfer — the settlor transfers assets (cash, investments, property) to an overseas trust or entity. (2) The purpose — one of the main purposes of the transfer was to avoid UK tax (this is a subjective test, but can be inferred from the structure). (3) The benefit — the settlor (or a connected person) receives a benefit from the trust (e.g., a distribution, a loan, or use of trust property). (4) The charge — if the conditions are met, the settlor is taxed on the trust's income as if it were their own income, regardless of whether the income is distributed. (5) Exemptions — several exemptions are available, including: (a) the settlor is non-domiciled and the income is not remitted to the UK (subject to the April 2025 reforms), (b) the trust is genuinely commercial and not tax-driven, (c) the income is taxed in the trust or the beneficiaries. The TOAA rules are complex and apply to a wide range of arrangements, not just formal trusts. Specialist advice is essential when setting up or receiving benefits from an overseas trust. Relevant legislation: ITA 2007, Part 13, Chapter 2, Sections 714-743 (transfer of assets abroad); ITA 2007, Sections 729-731 (exemptions). Example: A UK-domiciled individual transfers £1 million to an overseas trust (trustees in the Isle of Man). The trust earns £50,000 per year in income. If the TOAA rules apply (the transfer was to avoid UK tax and the settlor receives a benefit), the settlor is taxed on the £50,000 as if it were their own income, even if the income is not distributed. Common mistake: Assuming that the TOAA rules only apply to deliberately tax-driven arrangements. The rules can apply to any arrangement where one of the main purposes was to avoid UK tax, which can include arrangements with genuine commercial purposes.

How does IHT apply to overseas trusts?

IHT on overseas trusts depends on the settlor's domicile. UK-domiciled settlors' transfers to overseas trusts are chargeable transfers, and the trust is within the IHT net. Non-UK-domiciled settlors' transfers of non-UK assets are excluded property and outside the IHT net. The IHT treatment of overseas trusts depends on the settlor's domicile: (1) UK-domiciled settlor — transfers to an overseas trust are chargeable transfers (subject to IHT at 20% to the extent they exceed the nil-rate band, currently £325,000). The trust is within the IHT net and is subject to: (a) 10-year periodic charges (up to 6% of the trust's value above the nil-rate band), and (b) exit charges when assets leave the trust. The treatment is the same as for a UK trust — the overseas location of the trustees does not avoid IHT for a UK-domiciled settlor. (2) Non-UK-domiciled settlor — transfers of non-UK assets (foreign assets) to an overseas trust are 'excluded property' and outside the IHT net. No chargeable transfer arises, and the trust is not subject to 10-year charges or exit charges (as long as the assets remain non-UK). Transfers of UK assets are chargeable transfers (subject to IHT). (3) Deemed domicile — if the settlor becomes deemed domiciled (15 of 20 years of UK residence), the trust may be brought into the IHT net, even if it was previously excluded property. (4) April 2025 reforms — the April 2025 non-dom reforms changed the income tax and CGT treatment of non-doms, but IHT continues to be determined by domicile. The deemed domicile rules (15 of 20 years) still apply for IHT purposes. (5) Planning — non-domiciled settlors can use excluded property trusts to hold foreign assets outside the IHT net. However, the settlor should review the structure regularly, especially as they approach the 15-year deemed domicile threshold. Relevant legislation: Inheritance Tax Act 1984, Part 3 (IHT on trusts); IHTA 1984, Sections 6-8 (chargeable transfers); IHTA 1984, Section 48 (excluded property); IHTA 1984, Sections 267-267A (deemed domicile). Example: A non-domiciled individual sets up an overseas trust with £2 million of foreign shares. The transfer is excluded property and not subject to IHT. If the individual becomes deemed domiciled after 15 years of UK residence, the trust may be brought into the IHT net, and 10-year charges may apply. The trust should be reviewed before the 15-year threshold to consider planning strategies. Common mistake: Assuming that an overseas trust is automatically outside the IHT net. Only non-UK assets transferred by a non-domiciled settlor are excluded property. UK-domiciled settlors' overseas trusts are fully within the IHT net.

What is an excluded property trust?

An excluded property trust is an overseas trust holding non-UK assets, established by a non-domiciled settlor. The foreign assets are 'excluded property' and outside the UK IHT net, providing significant IHT savings for non-domiciled individuals. An excluded property trust is an overseas trust that holds non-UK (foreign) assets, established by a non-UK-domiciled settlor. The key benefit is that the foreign assets are 'excluded property' for IHT purposes, meaning they are outside the UK IHT net. Key features: (1) Eligibility — the settlor must be non-UK-domiciled at the time of the transfer. The trust must hold non-UK assets (foreign shares, foreign property, foreign bank accounts). (2) IHT benefits — no chargeable transfer on funding, no 10-year charges, no exit charges (as long as the assets remain non-UK and the settlor remains non-domiciled). (3) Deemed domicile risk — if the settlor becomes deemed domiciled (15 of 20 years of UK residence), the trust may lose its excluded property status. The assets may be brought into the IHT net, and 10-year charges may apply. (4) April 2025 reforms — the April 2025 non-dom reforms changed the income tax and CGT treatment of non-doms, but IHT continues to be determined by domicile. Excluded property trusts remain effective for IHT purposes (subject to the deemed domicile rules). (5) Settlor's death — on the settlor's death, the trust assets are not part of the settlor's estate for IHT purposes (they are held by the trust). However, the settlor's domicile at death determines whether the trust assets are within the IHT net. (6) Planning — excluded property trusts are a powerful IHT planning tool for non-domiciled individuals, but they must be established before the settlor becomes deemed domiciled. Regular reviews are essential, especially as the settlor approaches the 15-year threshold. Relevant legislation: IHTA 1984, Section 48 (excluded property); IHTA 1984, Sections 267-267A (deemed domicile); IHTA 1984, Sections 80-81 (overseas trusts). Example: A non-domiciled individual with £10 million of foreign assets sets up an overseas trust (trustees in Jersey) to hold the assets. The assets are excluded property and not subject to UK IHT. If the individual becomes deemed domiciled after 15 years, the trust should be reviewed to assess whether the assets remain excluded and whether additional planning is needed. Common mistake: Establishing an excluded property trust after the settlor has become deemed domiciled. Once the settlor is deemed domiciled, the trust cannot benefit from the excluded property regime. The trust must be established before the 15-year threshold.

How are distributions from overseas trusts taxed?

Distributions of accumulated income are taxed as income tax on the beneficiary. Distributions of capital are generally tax-free (unless they represent untaxed income). The tax treatment depends on the trust's tax position and the beneficiary's residence and domicile. The tax treatment of distributions from overseas trusts depends on the type of distribution and the trust's tax position: (1) Income distributions — distributions of trust income (or accumulated income) are taxed as income tax on the beneficiary. The tax rate depends on the type of income (e.g., dividend income at dividend rates, other income at savings or non-savings rates). The beneficiary may be able to claim a credit for tax paid by the trust on the income. (2) Capital distributions — distributions of trust capital are generally tax-free for the beneficiary (they are not subject to income tax or CGT). However, if the capital distribution represents untaxed income (e.g., income that accumulated in the trust and was not taxed), it may be taxed as income. (3) Settlor-interested trusts — if the settlor or a connected person is a beneficiary, the settlor may be taxed on the trust's income (under the TOAA rules or the settlor-interested trust rules), regardless of whether the income is distributed. (4) Non-settlor-interested trusts — for non-settlor-interested trusts, the trustees are taxed on trust income (at the trust tax rates), and distributions to beneficiaries carry a tax credit (representing the tax paid by the trustees). The beneficiary's tax is calculated based on the gross income and the tax credit. (5) Capital gains — when the trust sells assets, the gain is subject to CGT in the trust (if the trust is UK-resident or the assets are UK). Distributions of capital to beneficiaries are generally not subject to further CGT. The tax treatment can be complex, and specialist advice is recommended. Relevant legislation: ITA 2007, Part 13, Chapters 3-5 (trust taxation); ITA 2007, Sections 476-496 (beneficiary tax treatment); TCGA 1992, Section 87 (CGT on trust gains). Example: An overseas trust earns £50,000 of dividend income and distributes it to a UK-resident beneficiary. The beneficiary is taxed on the dividend income at the dividend rates (8.75%, 33.75%, or 39.35%). If the trust has already paid tax on the dividend, the beneficiary may be able to claim a credit. A capital distribution of £100,000 from the trust is generally tax-free (unless it represents untaxed income). Common mistake: Assuming that all distributions from overseas trusts are tax-free. Only capital distributions are generally tax-free — income distributions are subject to income tax, and capital distributions representing untaxed income may also be taxed.

International Tax › International

Cross-Border Trust Taxation

Cross-border trusts create complex UK tax issues for settlors, trustees, and beneficiaries. Understand the income tax, CGT, and IHT treatment of overseas trusts and how to manage compliance.

Book a Consultation +44 (0) 800 211 8657

Cross-border trusts — where the settlor, trustees, or beneficiaries are in different countries — create complex UK tax issues. The UK taxes overseas trusts differently depending on the residence and domicile of the settlor, trustees, and beneficiaries. Key issues include the taxation of trust income and gains, the remittance basis for trustees, anti-avoidance rules (such as the transfer of assets abroad provisions), and the IHT treatment of cross-border trust structures. Understanding these rules is essential for anyone involved in a cross-border trust.

Types of Trust for UK Tax

For UK tax purposes, trusts are classified as: (1) UK-resident trusts — where the trustees are UK resident. (2) Non-UK-resident trusts — where the trustees are non-UK resident. The tax treatment depends on the residence of the trust and the domicile/residence of the settlor and beneficiaries. Non-UK-resident trusts are subject to different rules, including the transfer of assets abroad (TOAA) anti-avoidance provisions.

Income Tax and CGT on Overseas Trusts

The income tax and CGT treatment of overseas trusts depends on the settlor's domicile and residence: (1) Non-domiciled settlor — overseas trusts may be able to hold foreign income and gains outside the UK tax net (subject to the April 2025 reforms and the FIG regime). (2) UK-domiciled settlor — overseas trusts are subject to UK tax on worldwide income and gains (as if the trust were UK-resident). (3) Anti-avoidance rules — the transfer of assets abroad (TOAA) provisions can tax the settlor on trust income if the transfer was to avoid UK tax. (4) Beneficiaries — beneficiaries receiving distributions may be subject to income tax on the distributions, depending on the type of income and the trust's tax position.

IHT and Overseas Trusts

IHT on overseas trusts depends on the settlor's domicile: (1) UK-domiciled settlor — transfers to an overseas trust are chargeable transfers, and the trust is within the IHT net (like a UK trust). (2) Non-UK-domiciled settlor — transfers of non-UK assets to an overseas trust are excluded property and outside the IHT net. However, if the settlor becomes deemed domiciled (15 of 20 years of UK residence), the trust may be brought into the IHT net. (3) Ten-year charges — overseas trusts with UK-domiciled settlors are subject to the 10-year periodic charge. (4) Exit charges — charges may apply when assets leave the trust.

Managing Cross-Border Trust Compliance

Managing cross-border trust compliance involves: (1) Reviewing the trust structure — assessing the residence of the trust and the domicile/residence of the settlor and beneficiaries. (2) Tax returns — filing the appropriate UK tax returns (trust tax returns, self-assessment returns for beneficiaries). (3) Anti-avoidance — checking whether the TOAA or other anti-avoidance rules apply. (4) IHT planning — reviewing the IHT position and considering planning strategies (e.g., excluded property trusts). (5) Specialist advice — cross-border trust taxation is complex, and specialist advice is essential.

Key Points

What You Need to Know

Cross-border trusts are taxed differently depending on the residence of the trust and the domicile of the settlor
Non-UK-resident trusts may hold foreign income and gains outside the UK tax net (subject to April 2025 reforms)
The transfer of assets abroad (TOAA) rules can tax the settlor on trust income
IHT depends on the settlor's domicile — UK-domiciled settlors bring the trust into the IHT net
Specialist advice is essential for cross-border trust structures

Expert Answers

International Tax Frequently Asked Questions

Detailed answers with legislation references, practical examples and common pitfalls.

Explore More

All International Tax Topics

Statutory Residence Test (SRT)Non-Dom Reforms April 2025 Overseas Workday Relief (OWR)Split-Year Treatment Double Taxation Treaties Transfer Pricing Permanent Establishment (PE)Controlled Foreign Companies (CFC)Withholding Tax on Cross-Border Payments Inbound Property Investment Outbound Expansion Structuring Cross-Border Employment Taxation Diverted Profits Tax (DPT)Anti-Hybrid & Mismatch Rules Corporate Interest Restriction Exit Charges & Company Migration Cross-Border Trust Taxation

Need Specialist International Tax Advice?

Our tax advisers can help you navigate international tax with clear, practical advice tailored to your circumstances.

Book a Consultation Call +44 (0) 800 211 8657