IHT and Excluded Property Trusts After April 2025: What Changed

Excluded Property Trusts: The Pre-April 2025 Position

An "excluded property trust" (EPT) under the pre-April 2025 rules was an offshore trust settled by a non-domiciled individual, holding non-UK sited assets, which benefited from complete exemption from UK IHT. The excluded property provisions were contained in sections 48(3) and 48(3A) of the Inheritance Tax Act 1984 (IHTA 1984).

Under the old rules, a non-domiciliary who settled an offshore trust before they became deemed domiciled (15 of 20 years rule) could shelter the trust assets from UK IHT indefinitely — even if they subsequently became deemed domiciled and lived in the UK for the rest of their life. The protection attached to the trust at the moment it was settled and persisted as long as the assets remained in non-UK sited form.

This was a profound planning advantage. A wealthy individual who arrived in the UK at age 40 and settled an offshore trust in year 14 of UK residence (just before the 15-year deemed domicile threshold) could shield their entire offshore estate from UK IHT for the rest of their life, even if they lived in the UK for another 40 years.

The October 2024 Budget and the Finance (No.2) Act 2025 ended this indefinite protection.

The April 2025 Change: LTUR Test for Trusts

From 6 April 2025, the excluded property status of an offshore trust is no longer permanent. It depends on whether the settlor (or, for IHT purposes on ten-year anniversaries and exits, the position of the trust itself) satisfies the new long-term UK resident (LTUR) test at the relevant IHT event date.

The New Test in Practice

A trust that was settled by a non-domiciliary and holds non-UK assets:

• Before the settlor becomes an LTUR (fewer than 10 of the preceding 20 years resident in UK): Assets remain excluded property. No IHT charge arises on ten-year anniversaries, exits, or the settlor's death.

• Once the settlor becomes an LTUR (10 of the preceding 20 years UK resident): The trust assets lose excluded property status. Ten-year anniversary charges (6% of the excess of the trust fund over the nil-rate band) and exit charges begin to apply.

The transition from EPT protection to IHT exposure happens automatically when the settlor crosses the LTUR threshold — there is no triggering event required beyond the passage of time.

Trusts Without a Living Settlor

For trusts where the settlor has died, HMRC's guidance (following the Finance (No.2) Act 2025 amendments to IHTA 1984) confirms that the excluded property status of the trust after the settlor's death is determined by reference to the settlor's status at the date of death:

• If the settlor died before April 2025 as a non-dom (not deemed domiciled): the pre-April 2025 rules continue to apply to that trust
• If the settlor died after April 2025: the LTUR test applies at the date of death to determine the initial position, and then the trust's own position is evaluated at each subsequent IHT event

Settlor Status at IHT Event	Trust Assets	IHT Treatment
Settlor alive, not LTUR (under 10 years)	Non-UK sited	Excluded property — no IHT
Settlor alive, LTUR (10+ years)	Non-UK sited	Relevant property — anniversary and exit charges
Settlor deceased pre-April 2025 as non-dom	Non-UK sited	Excluded property maintained (transitional)
Settlor deceased post-April 2025 as LTUR	Non-UK sited	Relevant property — charges apply

Trusts Settled Before 30 October 2024: Transitional Protections

The government confirmed at the Autumn Budget 2024 that trusts settled before 30 October 2024 (the date of the Budget) will benefit from transitional protection:

• For the period from 6 April 2025 to 5 April 2026: Excluded property trusts settled before 30 October 2024 are treated as retaining their pre-April 2025 excluded property status, even if the settlor has become an LTUR under the new test
• From 6 April 2026 onwards: The new LTUR test applies in full, including to trusts settled before October 2024

This transitional window is one year — not the extended period some practitioners had hoped for. Trustees of established offshore trusts who anticipated being affected by the change have from now until April 2026 to consider their options.

The Business Property Relief £1 Million Cap: April 2026

A separate but concurrent change affects trusts holding Business Property Relief (BPR) qualifying assets. From April 2026, an individual's lifetime BPR limit is capped at £1 million. This cap applies per individual across all BPR qualifying transfers in their lifetime, including transfers into trust.

For large offshore trusts that hold family business assets and have historically relied on BPR to shelter those assets from the IHT relevant property charge (on ten-year anniversaries and exits), the £1 million cap represents a further narrowing of available relief.

Practical Impact: Existing Trust Structures

A trust that was settled in 2010 and holds £5 million of unquoted shares in a family trading company has historically been able to claim BPR at the ten-year anniversary to reduce the IHT charge to nil. From April 2026, the BPR available within the trust is limited to the £1 million cap — the IHT charge will apply to the excess above £1 million at the relevant property charge rate of 6% every ten years.

On £4 million of shares above the BPR cap, the ten-year anniversary charge is £240,000. This is a significant change for family businesses held in trust.

Planning Options Before April 2026

Winding Up the Trust

For trusts where the settlor has become an LTUR, or is about to cross the threshold, and where the trust's primary purpose was IHT avoidance rather than genuine wealth management, consider whether winding up the trust and distributing assets to beneficiaries makes more sense than continued operation.

A trust wind-up while excluded property status still applies (before the LTUR threshold is crossed, or during the transitional year) may allow distribution of assets free of IHT. The CGT consequences of distribution must also be assessed.

Removing UK-Sited Assets

Non-UK sited assets retain excluded property status. UK sited assets do not — they were never excluded property. Reviewing the asset mix within the trust to ensure no UK property or UK securities are held within an EPT structure is a basic compliance step, but important.

Adding Substance to the Trust Structure

For trusts that are genuinely managed and controlled offshore — with trustee decisions made offshore, trustee board meetings held outside the UK, and trust administration conducted by independent offshore trustees — the risk of the trust being treated as UK-managed (and therefore UK-sited for IHT purposes) is low. Trustees should review their governance to ensure the trust's management and control is demonstrably offshore.

HPT Group advises trustees and settlors of offshore trusts on the post-April 2025 IHT landscape, including the analysis of excluded property status under the new LTUR test, transitional planning before April 2026, and the impact of the BPR cap on family business trust structures. Proactive engagement with the new rules before the transitional period expires is essential. Contact our trust advisory team or apply for a consultation.