UK Tax on Trusts: How Settlors and Beneficiaries Are Taxed When Non-Resident

Trusts have long been central to international wealth planning for UK-connected families. They offer potential IHT mitigation, asset protection, and succession planning benefits that individual ownership cannot replicate. But the interaction between UK trust tax rules and international mobility is one of the most complex areas of UK tax law. The income tax, CGT, and IHT treatment of trusts depends on a multi-layered analysis of where the trust is resident, where the settlor was domiciled when the trust was settled, whether the trust is settlor-interested, and whether beneficiaries are UK-resident.

This guide provides an overview of how UK tax applies to the settlors and beneficiaries of trusts when either (or both) are non-resident, as of 2026.

Trust Residence

For UK income tax and CGT purposes, a trust is resident in the UK if the general administration of the trust is ordinarily carried on in the UK and the majority of trustees are UK-resident. If the majority of trustees are non-UK-resident or the general administration is overseas, the trust may be non-UK-resident.

Trust residence is not simply a matter of where the trustees live — HMRC looks at where decisions are actually made, where records are kept, and where meetings occur. A trust with a majority of non-resident trustees but whose investment manager, lawyers, and records are all in London may still be treated as UK-resident.

Income Tax: The Settlor-Interested Charge

Where a UK-resident settlor settles property into a trust and retains the ability to benefit from the trust (a "settlor-interested" trust), all income arising within the trust is treated as the settlor's income for UK income tax purposes, regardless of whether the income is paid to the settlor. This is the "settlor-interested" charge under Chapter 5 of Part 5 ITTOIA 2005.

For non-resident settlors: A non-UK-resident settlor is subject to the settlor-interested charge only if the income arises from UK sources. Non-UK-source income within a settlor-interested trust is not charged on a non-resident settlor. This means that an offshore trust settled by a non-resident settlor with non-UK assets and non-UK beneficiaries may generate no UK income tax liability on the settlor even if the settlor is connected to the UK in other ways.

For returning settlors: If a non-resident settlor returns to the UK, they become subject to UK income tax on the settlor-interested trust income from the date of return. Settlors returning from overseas should carefully consider whether trust structures need to be reviewed before resuming UK residence.

CGT: The Section 86 Charge

Where a non-UK-resident trust has an "associated settlor" who is UK-resident, gains arising within the trust may be treated as the settlor's gains for UK CGT purposes under TCGA 1992, s.86. Historically s.86 only applied where the settlor was also UK-domiciled (or deemed domiciled), but the abolition of domicile from the tax system on 6 April 2025 removed that domicile link.

Key elements of s.86 (post-April 2025):

• Applies broadly where: (a) the settlor is UK-resident; and (b) the trust is not UK-resident
• Treats gains accruing to the non-UK-resident trust as if they were gains of the settlor
• The charge falls on the settlor even if they receive no benefit from the trust

For internationally mobile individuals, the position is:

• Before 6 April 2025, a UK-resident settlor who was not UK-domiciled and not deemed UK-domiciled could fall outside s.86 during periods of non-domicile (via the now-abolished trust protections). Following the 2025 reforms, the income tax and CGT trust protections were removed and domicile is no longer the connecting factor, so a UK-resident settlor will generally be within s.86 regardless of domicile; the four-year Foreign Income and Gains (FIG) regime can apply to new arrivers in their first four years of UK residence
• A non-UK-resident settlor is not subject to s.86 at all, as UK residence is a prerequisite

CGT: The Section 87 Charge on Beneficiaries

Where a non-UK-resident trust has accumulated capital gains and makes a "capital payment" to a UK-resident beneficiary, those gains are taxed on the beneficiary under TCGA 1992, s.87. The capital payment is "matched" with accumulated trust gains and the matched amount is taxed as a CGT gain of the beneficiary.

This creates an important planning consideration for non-resident beneficiaries: if a beneficiary is non-UK-resident when they receive a capital payment from an offshore trust, the s.87 charge does not apply. Capital payments to non-residents are outside the s.87 net.

A "matching pool" of undistributed gains within the trust — sometimes built up over many years — can therefore be efficiently distributed during periods when beneficiaries are non-UK-resident. Once a beneficiary returns to the UK, distributions would be matched against the pool and subject to UK CGT.

Income Tax: The Transfer of Assets Abroad Rules

The transfer of assets abroad (TOAA) rules (Chapter 2 of Part 13 ITA 2007) are broad anti-avoidance provisions that can attribute income of an overseas entity (including a trust) to a UK-resident individual where that individual has transferred assets abroad and retains the power to enjoy income arising from those assets.

The TOAA rules can apply even where:

• The overseas entity is a trust (not just a company)
• The settlor does not benefit directly from the trust income
• The structure is not primarily motivated by tax avoidance

HMRC has increasingly applied the TOAA rules to offshore trust structures, and the interaction with the specific trust rules (s.86 and s.87) is complex. The main purpose motive defence ("the transfer was not primarily for the purpose of avoiding income tax") must be assessed carefully.

IHT and Trusts

IHT on trusts involves three potential charges:

Entry charge: When property is settled into a trust (other than a bare trust or interest-in-possession trust meeting specific conditions), an entry charge of up to 20% applies to the extent that the property settled exceeds the settlor's available nil-rate band (£325,000 as of 2026).

Periodic charge: Every ten years, a discretionary trust is subject to a periodic charge of up to 6% on the value of the trust fund (after allowances). This is calculated using a complex formula based on the trust fund value, the nil-rate band, and the trust's history.

Exit charge: When property leaves the trust (distributed to beneficiaries), an exit charge of up to 6% applies (pro-rated based on the time since the last periodic charge).

Excluded property: For non-domiciled settlors, property settled into a trust before April 2025 while the settlor was non-domiciled constitutes "excluded property" for IHT purposes — meaning no IHT charges apply to the non-UK assets within the trust (under the old domicile-based rules). From April 2025, however, the new long-term residence test applies to IHT as well, meaning that individuals who have been UK-resident for 10 or more of the preceding 20 tax years are subject to IHT on worldwide assets, and any trust they settle may no longer benefit from excluded property status.

This represents one of the most significant practical changes for internationally mobile families with long UK residency periods. Trust structures settled before April 2025 under the old excluded property rules require urgent review against the new rules.

Trust Registration

The UK Trust Registration Service (TRS) requires most UK trusts — and many non-UK trusts with UK tax consequences or UK assets — to be registered with HMRC. Non-registration and non-updating of registration attracts penalties. The conditions for TRS registration for offshore trusts have been extended significantly since 2020.

How Global Investments Can Help

Global Investments advises settlors, trustees, and beneficiaries of UK and offshore trusts on the full spectrum of UK trust tax issues — from the settlor-interested charge and s.86 exposure for non-residents, through to s.87 planning for non-resident beneficiaries and the IHT treatment of excluded property trusts post-2025. We work closely with specialist trust law firms and tax counsel across multiple jurisdictions to review existing structures, advise on restructuring, and ensure ongoing compliance. Trust tax is among the most complex areas of UK personal tax — professional advice specific to your trust and family circumstances is essential. This guide reflects the position as of 2026; trust tax rules are subject to change.