Excluded Property Trusts and UK Situs Assets Explained

EPTs have historically played an important role in estate planning for internationally mobile individuals. However, the introduction of the UK’s long-term residence (LTR) regime in April 2025 changed how excluded property treatment applies to overseas trust assets.

For UK expats holding assets across multiple jurisdictions, the inheritance tax position now requires consideration of asset situs, the settlor’s long-term UK residence status and any applicable transitional provisions.

How Do Excluded Property Trusts Work?

UK law distinguishes between two trust asset categories for inheritance tax purposes:

1. Relevant property: Assets held within certain trusts that fall within the IHT relevant property regime.
2. Excluded property: Assets that fall outside the scope of UK IHT under specific statutory rules, including for certain trust charges.

EPTs are generally structured to hold assets that may qualify as excluded property, such as:

• Overseas property
• Offshore bonds
• Foreign bank accounts
• International stocks and shares

Assets situated outside the UK may qualify as excluded property, provided the relevant statutory conditions are met. Their treatment depends on their legal situs, the settlor’s long-term UK residence status and any applicable exceptions. Special rules also apply to certain overseas assets connected with UK residential property and, from 6 April 2026, certain UK agricultural property.

Despite their name, EPTs may hold assets that do not qualify as excluded property. Excluded property treatment must therefore be assessed for each asset under the relevant IHT rules.

EPTs are used to hold qualifying assets outside the scope of UK IHT. They are typically structured as discretionary trusts, under which trustees retain discretion over distributing assets to a specified group of beneficiaries. You (the settlor) can nominate an individual or class of people, but they do not have a fixed right to the trust assets. The trustees make distribution decisions in accordance with the trust deed, taking account of any non-binding wishes expressed by the settlor.

The IHT treatment of assets held in an EPT can depend on the settlor’s long-term UK residence status. If the settlor is a long-term UK resident when a relevant chargeable event occurs, overseas assets held in the trust may fall within the UK IHT scope, even if they were originally settled while the settlor was living outside the UK.

Different rules can apply to qualifying interest in possession trusts, where the beneficiary’s long-term residence status may also be relevant.

Why Have Excluded Property Trusts Been Used in International Estate Planning?

Under the former domicile-based IHT regime, internationally mobile individuals used EPTs to reduce inheritance tax exposure.

Before 6 April 2025, qualifying overseas assets placed into an EPT by a non-UK domiciled settlor could generally retain their excluded property status even if the settlor subsequently became UK domiciled or deemed domiciled. Under the domicile-based regime, the settlor’s domicile status when the assets became comprised in the settlement was central to their treatment, subject to specific statutory exceptions.

By placing qualifying overseas assets into an EPT before becoming UK domiciled or deemed domiciled, individuals could keep those assets outside the UK IHT scope, which would otherwise extend to their worldwide assets.

The April 2025 reforms changed this position. For many trusts, excluded property treatment now depends on the settlor’s long-term UK residence status when a chargeable event occurs, rather than being fixed when the assets were originally settled.

What Is the Treatment of UK-Situs Assets in Excluded Property Trusts?

UK-situs assets typically do not qualify as excluded property, so they do not receive the same IHT treatment as qualifying overseas assets in an EPT. Assets with a UK situs are physically or legally situated in the UK and generally remain within the scope of UK IHT, regardless of the settlor’s residence status.

However, being within the scope of IHT does not necessarily mean that tax is payable. The availability of exemptions, reliefs and specific statutory exclusions must also be considered.
One exception involves certain UK government securities known as FOTRA (free of tax to residents abroad). These securities may qualify as excluded property where the relevant conditions are satisfied, including the requirements applying to the particular security and its ownership.

The presence of UK-situs assets does not automatically affect the excluded property treatment of qualifying overseas assets within the same trust. However, the treatment of each asset depends on the statutory rules and the wider trust structure.

For example, a trust may hold both UK shares and an overseas investment portfolio. The UK shares would generally remain within the IHT scope, while the overseas portfolio may qualify as excluded property depending on the settlor’s long-term residence status and any applicable transitional protection.

For trusts holding mixed portfolios, each asset’s situs and applicable IHT treatment must be assessed separately. Certain overseas assets, including indirect interests in UK residential property, may also fall within UK IHT under specific rules.

What Is the Relevant Property Regime and What Charges Does It Impose?

Assets settled in discretionary trusts that do not qualify as excluded property generally fall within the relevant property regime for IHT purposes, unless a specific exemption or alternative trust regime applies, such as the rules for certain trusts for disabled persons.

While UK-situs assets are typically considered relevant property when held in discretionary trusts, non-UK-situs assets may also fall into this category if the settlor is a long-term UK resident when a relevant chargeable event occurs.

Once an asset falls within the relevant property regime, specific IHT charges may arise:

Separately, additional IHT may arise if the settlor dies within seven years of making a chargeable lifetime transfer to the trust. The calculation can involve previous chargeable transfers, failed potentially exempt transfers (PETs), available reliefs and credit for lifetime IHT already paid. This is distinct from the trust’s ten-year and exit charges.

Overseas assets that previously benefited from excluded property treatment may become relevant property when the settlor meets the LTR conditions. Conversely, assets may leave the regime when the settlor ceases to be an LTR, potentially resulting in an exit charge.

How Are Excluded Property Trusts Affected by the UK’s Long-Term Residence Regime?

Following the 6 April 2025 reforms, the UK IHT system shifted from a domicile-based regime to a residence-based approach. Long-term UK residence replaced domicile and deemed domicile as the principal factor determining the scope of UK IHT on overseas assets.

Domicile can still be relevant to historical transfers, transitional provisions and certain inheritance tax treaties.

You generally qualify as an LTR in a tax year if you have been UK tax resident for at least ten of the preceding 20 tax years. This includes individuals who were resident for the previous ten consecutive tax years.

If you qualify as a long-term UK resident, your worldwide assets may be subject to UK IHT, including overseas assets held personally and certain assets settled in trusts. Once you lose your LTR status, your personally held overseas assets generally fall outside the UK IHT scope, while UK-situs assets remain within scope.

The treatment of assets held in trust must be assessed separately.

Under the previous regime, you could subsequently become UK domiciled (or deemed domiciled) while qualifying assets retained the excluded property status established when they were settled.
Since the current regime generally examines the settlor’s LTR status when relevant chargeable events occur, an asset’s excluded property status can change over time. However, specific transitional protections apply to certain assets held in trusts before 30 October 2024.

The Inheritance Tax Tail: What Does It Mean for UK Expats?

Relocating from the UK and becoming a tax resident in another country does not automatically remove your LTR status and the associated UK IHT obligations. The post-departure IHT tail can last up to ten tax years, depending on your prior UK residence history:

These are the standard periods under the LTR rules. Specific transitional provisions can produce a different outcome for individuals who were non-UK resident in the 2025/26 tax year and met the relevant historical domicile conditions.

If you remain outside the UK for ten consecutive tax years, your previous UK residence history is generally reset for the purposes of the LTR test.

For UK expats considering EPTs, this means that moving overseas may not immediately remove foreign trust assets from the UK IHT regime. The timing of chargeable events, including ten-year anniversaries and changes in LTR status, therefore requires careful consideration.

How Do the Transitional Rules Apply to Existing Excluded Property Trusts?

Before the 2025 reforms, non-UK-domiciled trust settlors could establish an EPT, retain the ability to benefit from qualifying excluded property, and avoid the application of the gifts with reservation of benefit (GWR) rules to that property.

These rules generally apply when an individual gives away an asset but continues to benefit from it, potentially bringing the asset back within their estate for IHT purposes.

The 2025 reforms changed the treatment of overseas trust assets where the settlor is a long-term UK resident. However, the government introduced transitional provisions for qualifying excluded property already held in trusts immediately before 30 October 2024.

The applicable treatment depends on when the assets became comprised in the settlement, whether subsequent additions were made and the settlor’s circumstances.

Trusts Established Before 30 October 2024

Qualifying excluded property held in a settlement immediately before 30 October 2024 can benefit from specific transitional protections.

These include:

1. Gifts with reservation protection: Qualifying property can remain outside the settlor’s estate under the GWR rules, even where the settlor subsequently becomes a long-term UK resident, provided the statutory conditions continue to be satisfied.
2. Qualifying interest in possession protection: Qualifying property in certain interest in possession settlements is protected from specified IHT charges when the relevant interest ends or the beneficiary dies.
3. Relevant property charge cap: Where qualifying former excluded property becomes relevant property, the combined ten-year anniversary and exit charges are subject to a £5 million cap per ten-year charging cycle, provided the property continues to meet the statutory conditions. The cap is proportionately reduced for the initial period beginning on 6 April 2025.

The £5 million figure is a cap on qualifying IHT charges, not an exemption for £5 million of trust assets. It does not prevent relevant property charges from arising.

Trusts Established Between 30 October 2024 and 5 April 2025

Trusts established during this period were generally subject to the former domicile-based rules when assets were initially settled.

However, they do not automatically qualify for the transitional protections available to qualifying excluded property already held in a settlement immediately before 30 October 2024.

From 6 April 2025, the LTR rules generally determine whether overseas assets in these trusts qualify as excluded property at relevant chargeable events.

Assets settled during this period may therefore have qualified under the former domicile rules without receiving the same transitional protection as assets held before 30 October 2024.

Trusts Established From 6 April 2025 Onwards

For new trusts established from 6 April 2025, the LTR framework generally applies.

The settlor’s long-term UK residence status is relevant both when assets are transferred into the trust and when subsequent IHT charges arise.

Overseas assets may qualify as excluded property when the settlor is not an LTR, but they may subsequently become relevant property if the settlor meets the LTR conditions.

Additions to existing settlements made on or after 30 October 2024 do not benefit from the specific transitional protection available to qualifying property already held at that date. However, adding new assets does not automatically remove the protection from assets that continue to meet the original transitional conditions.

UK-situs assets and overseas assets whose value is attributable to UK residential property do not qualify for these specific transitional protections, even where they were held in the trust before 30 October 2024. The exclusion can continue to apply where such assets are subsequently sold and the proceeds invested overseas.

For existing EPTs, the date each asset entered the trust can therefore be as important as the date the trust itself was established.

What Should UK Expats Consider When Reviewing an Excluded Property Trust?

The 2025 reforms have made it necessary to reassess how existing excluded property trusts fit within an international inheritance tax planning strategy.

When reviewing an existing EPT, consider the following:

• Reviewing mixed trust assets: Assess the tax treatment of each holding, including its legal situs, the settlor’s LTR status and any applicable transitional provisions, as part of your wider estate planning.
• Exploring optimal ways to hold UK and overseas assets: While it is possible to hold both UK assets and excluded property in a single trust, separating them may simplify management and reporting. However, restructuring could trigger exit charges and other tax liabilities, so a careful evaluation is needed before transferring assets between trusts or changing their ownership.
• Understanding whether additions to existing trusts are tax-efficient: Additions to trusts established before 30 October 2024 cannot benefit from the same transitional protections as qualifying property already held at that date. It is therefore worth considering the tax implications before adding assets to an existing settlement, particularly where the settlor’s LTR status has changed.
• Monitoring your LTR status: As long-term UK residence directly affects the taxation of EPTs, regularly monitoring your LTR position is crucial for understanding tax implications and adequately planning your estate. Residence status should be reviewed before relevant chargeable events, including ten-year anniversaries.

For internationally mobile families, the UK IHT position is only one part of the estate planning assessment. Assets excluded from UK IHT may still be subject to estate, inheritance, gift or succession taxes overseas. Relevant double taxation conventions and local trust rules may also affect the outcome.

Before restructuring an existing EPT, transferring UK-situs assets or adding new overseas investments, it is worth obtaining coordinated UK tax and legal advice alongside advice in any other relevant jurisdiction.