Excluded Property Trusts and UK Inheritance Tax in 2025

How excluded property trusts shield non-UK assets from UK inheritance tax in 2025, and why the move to a residence-based regime changes the calculus.

For decades, the excluded property trust was the quiet workhorse of international estate planning into and out of the United Kingdom. A non-domiciled individual could settle non-UK assets into trust and, in broad terms, place that wealth permanently beyond the reach of UK inheritance tax (IHT) for the whole family line. It was elegant, durable, and entirely lawful.

That settled world has changed. From 6 April 2025 the UK moved its inheritance tax system from a domicile basis to a residence basis. The familiar concept of domicile, which had governed IHT for generations, no longer determines who is exposed. Excluded property status now turns on residence history rather than domicile, and anyone who relied on older structures should treat 2025 as a moment to re-examine, not a moment to assume continuity.

This article explains what an excluded property trust is, how the 2025 reforms reshape the protection it offers, and the traps that catch people who set up a structure once and never revisit it.

What an excluded property trust actually is

An excluded property trust is not a special species of trust. It is an ordinary settlement that happens to hold assets which fall outside the UK inheritance tax net. The protection comes from the character of the assets and the status of the person who settled them, not from any magic in the trust deed.

Historically, where a non-UK-domiciled settlor placed non-UK situs property into trust, that property was "excluded property" and sat outside IHT. It escaped the ten-year periodic charges and exit charges that apply to most trusts, and it generally stayed outside the settlor's estate on death even if they later became UK domiciled or deemed domiciled.

The key word remains settled. The status was tested at the moment assets entered the trust. If the settlor qualified then, the assets typically retained their excluded character afterwards. That timing point was the whole engine of the planning, and it remains central, though the qualifying test has changed.

How the 2025 residence-based regime changes things

From April 2025, the UK no longer asks whether a settlor is domiciled or deemed domiciled. It asks whether they are a long-term resident, broadly someone who has been UK tax resident for a defined number of years within a recent window. Once that threshold is crossed, worldwide assets come into scope for inheritance tax, including, in many cases, assets the person has placed in trust.

For excluded property trusts the consequence is significant. Whether trust assets are excluded is now tested by reference to the settlor's residence status, and that status is tested on an ongoing basis rather than frozen at the date of settlement in the way many people assumed. A settlor who becomes a long-term resident can find that assets which were comfortably outside IHT are drawn back into the periodic and exit charge regime, and potentially into their estate.

There are transitional rules, and the precise mechanics depend on when a trust was created, who the settlor is, and how long they have been resident. The direction of travel, however, is clear: prior insulation can no longer be taken for granted. Trusts that were genuinely watertight under the old domicile rules may now carry exposure, and the analysis needs to be done on the specific facts as they stand in 2025 and beyond.

Who is most affected

The people most exposed are long-term UK residents who built structures on the old non-dom footing. A founder who arrived a decade ago, settled overseas assets into trust while non-domiciled, and assumed permanent protection should treat that assumption as live and unconfirmed rather than safe.

Internationally mobile families are also affected, because residence is now the trigger. A settlor who moves in and out of UK residence over the years can change the IHT character of trust assets through their own movements, sometimes without realising it. Where you live now matters more than where you were born or where you intend to die, which is a meaningful reversal of the previous logic.

Conversely, genuinely non-resident settlors who have never built up a long UK residence history may still find that non-UK assets in trust remain outside the net. The regime has not abolished the concept of property sitting outside UK IHT; it has changed the test for who can rely on it.

Common pitfalls

The first and most damaging pitfall is assuming the old analysis still holds. A trust deed drafted in 2014 says nothing about the 2025 rules. Treating a decade-old opinion as current is the single most common error we see.

A second pitfall is conflating income tax, capital gains tax, and inheritance tax. The non-dom reforms touched all three, but they do not move in lockstep. A structure can be efficient for one tax and exposed for another, and excluded property status speaks specifically to IHT.

Third, people underestimate reporting and transparency. Trusts with UK connections face registration and disclosure obligations, and the existence of a structure is far more visible to HMRC than it was a generation ago through international information exchange. Protection that depends on opacity is not protection at all; it is a liability waiting to surface.

Finally, beware of last-minute restructuring. Moving assets, adding or removing settlors, or unwinding a trust in response to the reforms can crystallise charges or unwind the very protection you are trying to preserve. The timing of any change is itself a tax event and should be modelled before, not after, it is made.

Reviewing an existing structure

A sensible review starts with three questions. When was the trust created and who was the settlor at that time. What is the settlor's residence history, measured against the long-term resident threshold as it now applies. And what assets does the trust actually hold, by situs and character.

Only with those facts can anyone say whether the trust still delivers excluded property treatment, whether it now carries periodic and exit charge exposure, and whether any restructuring is warranted or whether the right answer is simply to leave a still-effective structure alone.

How HPT helps

We help internationally mobile individuals and families understand where they now stand under the residence-based regime, review existing excluded property trusts against the 2025 rules, and coordinate with trustees and tax counsel so that any changes are made deliberately rather than reactively. Where a fresh structure is appropriate, we design it to be defensible, transparent, and built around your real residence and succession plans.

If you hold or are considering an excluded property trust, we would be glad to review your position in light of the current rules.