Americans arriving in the UK – have you made a new trust yet?

The UK’s Inheritance Tax (IHT) regime significantly changed in April 2025. The basis for determining IHT liability has shifted from domicile to residence – a change that carries substantial implications for international clients. While the reform introduces new tax challenges, this article explores a valuable planning opportunity for US citizens who have recently moved to the UK.

April 2025 IHT changes for trusts (for non-Americans)

Under the new rules, an individual who has been UK-resident for 10 out of the previous 20 tax years is classified as a long-term resident (LTR). An LTR’s entire worldwide estate falls within the scope of UK IHT, applying to both lifetime transfers and assets held at death. By contrast, somebody who is not an LTR is only subject to UK IHT on his or her UK assets and any non-UK assets that derive their value from UK residential property.

Under the new regime, trusts set up by non-LTRs will initially be outside of the scope of IHT. If, however, the settlor becomes an LTR in future, the trust will then be within the scope of IHT and will be subject to IHT charges at a rate of up to 6% every 10 years and on assets leaving the trust. This marks a departure from the previous framework, where trusts established by non-UK domiciled individuals could shield non-UK assets from UK IHT indefinitely regardless of the settlor’s ongoing domicile status.

In addition, for most trusts funded since 30 October 2024, if the settlor is capable of benefitting from the trust, then as soon as the settlor becomes an LTR the entire trust fund will be treated for IHT as though the settlor still owned the assets personally under the gift with reservation of benefit (GROB) rules, leading to a 40% IHT charge on the settlor’s death.

Treaty relief for trusts made by US citizens

Despite the domestic law changes, the UK/US Estate and Gift Tax Treaty (the treaty) provides important exemptions for US citizens relocating to the UK.

According to the treaty, a US citizen retains their US domicile for treaty purposes for three years following his or her departure from the US, and UK tax authorities are not permitted to charge IHT on any property settled into trust if, at the time the settlement was made, the settlor was domiciled in the US and was not a UK national.

This treaty provision creates a three-year window during which a US citizen (provided they are not also a UK national) may establish a trust to shelter assets from IHT. Crucially, the trust remains outside the scope of UK IHT permanently, even if the settlor later becomes a LTR.

Should the trust be revocable or irrevocable?

In our previous article, we examined the UK IHT treatment of US revocable trusts, which are commonly used estate planning vehicles designed to avoid the lengthy and costly probate process in the US. For US tax purposes, these trusts are typically classified as ‘grantor’ trusts, meaning they are transparent for federal income tax purposes, and the settlor is treated as the owner of the trust’s assets, income and gains. In the UK, depending on their terms, such trusts may be regarded as bare trusts, which would be similarly treated as transparent for tax purposes.

To benefit from the treaty relief outlined above, the trust must constitute a tax-opaque ‘settlement’ under UK IHT legislation. A standard US-style revocable trust, where the settlor often serves as both trustee and sole beneficiary during his or her lifetime, will not meet this requirement. It may, however, be possible for US clients to adapt their existing revocable trust structures so that they are not tax transparent for UK purposes.

Can I benefit from my own trust in future?

Yes. Our view is that the terms of the treaty will also prevent the GROB rules from applying to a trust set up by a US domiciliary. The practical consequence of this is that the trust’s assets would not form part of the settlor’s estate even though they are a beneficiary of the trust.

Can I create a pilot trust now and fund it later?

A strict interpretation of the treaty provisions suggests that a US citizen may establish a pilot trust, initially funded with minimal assets, upon arrival in the UK and subsequently contribute additional assets at a later date. This is because, for treaty purposes, the critical date is the date of trust creation rather than the date of subsequent funding. This approach may offer a practical solution for clients seeking to preserve treaty protection while deferring trust funding.

If possible, however, trusts should be funded before the settlor becomes a LTR (ie within their first 10 years of UK residence). Although the treaty will prevent UK IHT charges applying to the trust itself, our view is that a 20% IHT entry charge would apply on the settlor on the transfer of assets to the trust after they have become a LTR.

Can the trust hold UK assets?

It is usually best to initially fund the trust with non-UK assets, since a non-LTR is not exposed to the risk of an IHT entry charge by doing so. However, once funded, the trustees may later invest in UK assets. So long as the trust does not hold UK land or buildings, or certain business assets, it will continue to benefit from IHT exemptions.

Can the trustees be UK resident?

Yes absolutely – the residence of a trustee makes no difference to the IHT treatment of the trust, and if the trust beneficiaries are themselves UK resident it may simplify their income tax and capital gains tax affairs considerably to have UK resident trustees. This may also reduce the need for (potentially costly) professional trustees.

The Birketts view

For US citizens relocating to the UK, the post-April 2025 IHT regime presents both challenges and opportunities. With careful planning, particularly within the first three years of residence, it is possible to mitigate future UK IHT exposure through strategic use of trusts. Professional advice should be sought to ensure compliance and to optimise the available reliefs under the treaty.

If you would like to discuss your US/UK estate planning arrangements, or those of your clients, please get in touch with us.