The Excluded Property Trust After Long-Term Residence, for a US Settlor

An excluded property trust used to be settled once and safe for good: non-UK assets put into trust by a settlor who was not UK domiciled stayed outside inheritance tax for the life of the trust, whatever happened to the settlor afterwards. Since 6 April 2025 that protection is tested against the settlor's residence instead, and it is retested at every chargeable event. For a settlor who is also a US person, the reform creates something sharper than a UK tax cost: the IRS continues to treat the trust as though it does not exist, in the same years HMRC begins treating it as a separate taxable entity with charges of its own, and no credit runs in either direction.

What changed, in two sentences

Non-UK property in a settlement is excluded property only at times when the settlor is not a long-term UK resident. Long-term residence is a day-count test — UK residence in at least 10 of the previous 20 tax years — so status is no longer fixed at the moment of settlement but reassessed whenever a charge might arise.

We have set out the long-term residence test, how the counting works and the treaty position in detail in UK inheritance tax and the long-term residence rules for US citizens. This article is about what the test does to a trust you settled, which is a different question from what it does to your own estate.

The consequence that surprises trustees most

Because status is tested at each event rather than at settlement, the trust can move in and out of charge more than once.

When the settlor becomes a long-term resident, the non-UK assets stop being excluded property and fall into the relevant property regime.
When the settlor later ceases to be a long-term resident, those same assets become excluded property again — and that transition out can itself trigger a proportionate exit charge under section 65 of the Inheritance Tax Act 1984.

Leaving the regime is a chargeable event. That is the single most counter-intuitive feature of the reform, and HMRC's own worked examples in the Inheritance Tax Manual at IHTM47022 go through it. A settlor who emigrates to solve the problem may crystallise a charge on the way out, and the timing of that departure is worth modelling before it happens rather than after.

Long-term residence also persists for a period after someone leaves the UK — a minimum of a few tax years and a maximum of a decade, scaled to how long they were resident. The trust therefore stays in charge through a tail that outlasts the move.

What the relevant property regime actually costs

Once non-UK trust assets are relevant property, three charges can arise:

an entry charge on value transferred into the settlement above the available nil-rate band, currently £325,000, at the lifetime rate for chargeable transfers — confirm that rate for the year of the transfer;
a ten-year anniversary charge on each anniversary of the settlement, at a low single-digit percentage of the trust's value, computed on the regime's own rules rather than a flat rate;
a proportionate exit charge when property leaves the trust, scaled by how much of the ten-year cycle has run.

There is also a statutory cap on relevant property charges per ten-year cycle for qualifying former excluded property. It is widely mentioned and rarely relevant: it only begins to help trusts very much larger than the ones most readers hold, and it should not be read as general relief. What happens when the trust distributes is covered in appointments from a UK discretionary trust to a US beneficiary.

The transitional line, and the trap inside it

Property that was excluded property in a settlement immediately before 30 October 2024 carries transitional protection from the gift with reservation of benefit rules — which matters enormously, because a settlor-interested trust would otherwise risk the assets being treated as remaining in the settlor's own estate as well as being charged inside the trust.

Two things get no protection at all:

settlements made on or after that date; and
additions to an older, protected settlement.

That second point is where otherwise careful families come unstuck. A routine top-up — a further property, a tranche of shares, a cash injection to fund trustee expenses — is an addition, and the added property has no transitional protection even though the original settled property does. Before any further value goes into a pre-30 October 2024 structure, the question to ask is not whether the trust is grandfathered but whether this particular transfer will be.

Two further points of scope worth stating plainly: UK situs assets in a trust were never excluded property and are unaffected by any of this, and a settlor who died before 6 April 2025 leaves a trust still governed by the old domicile-based test.

Where the US settlor's problem actually is

Almost everything published on this subject assumes the settlor is British. If the settlor is a US citizen, a green-card holder or otherwise a US person, the UK reform collides with the US treatment of the same structure, and the two do not merely differ — they contradict each other.

The IRS usually treats the trust as not existing. A trust the settlor can benefit from, or over which the settlor has retained the relevant powers, is normally a grantor trust for US purposes. The practical effect is that the trust is transparent: its income and gains are reported on the settlor's own Form 1040 as though the trust were not there, the settlor files Form 3520-A as owner of a foreign trust, and the trust assets remain part of the settlor's US taxable estate on death. The IRS's own guidance on these filings is at About Form 3520-A, and we cover the filing mechanics in foreign trusts and Form 3520 for US persons in the UK.

HMRC now treats the same trust as a separate chargeable entity. From the moment the settlor becomes a long-term resident, the settled property is relevant property with its own ten-year cycle and its own exit charges, assessed on the trustees.

So the same assets are, simultaneously:

inside the settlor's estate for US estate tax, because the US ignores the trust; and
inside the trust for UK inheritance tax, because the UK does not.

Nothing reconciles those two positions. A UK ten-year anniversary charge is a charge on trustees, during the settlor's lifetime, on property the US does not accept has left the settlor. It is not a death duty paid by an estate, so it does not sit naturally within the foreign death duty credit the US-UK estate and gift tax convention provides, and the convention was not drafted with a residence-based trust regime in view. The result is a real risk of paying UK charges inside the trust and US estate tax on the same assets, with no credit running either way.

That is the position to get advice on, and it is the reason a structure that is merely inefficient for a British settlor can be actively punitive for an American one.

Three practical consequences follow.

The settlor's US filings do not change when the UK treatment does. Form 3520-A, the grantor trust reporting and the inclusion in the US estate all continue exactly as before. Nothing about becoming a long-term resident relieves any of it.
Excluding the settlor from benefit is the standard UK lever and a US complication. Removing the settlor's ability to benefit is the first thing a UK adviser will consider, for good reason. But it may also end grantor trust status for US purposes, converting the trust into a foreign non-grantor trust with a different and generally worse US regime for US beneficiaries — distributable net income, accumulation distributions and the interest charge on them. Never pull that lever on UK advice alone.
Unwinding is not free on either side. Distributing out can trigger a UK exit charge and a US reporting event at the same time, and for a US beneficiary the US consequences of receiving the distribution may exceed the UK charge avoided.

For the mirror-image fact pattern — a US trust with a UK-resident beneficiary — see US trusts and UK resident beneficiaries.

Beware the date on what you are reading

This area has been rewritten recently enough that a large share of the briefings still ranking on it are written in the wrong tense: some describe the old domicile test as current, others forecast the reform as a future change and were never updated after it took effect. When you read anything on this subject, including this page, look for the date and for whether the statement is about the law now or the law then.

Trustee compliance has its own calendar alongside all of this; if the structure is not registered, start with the Trust Registration Service for US-connected trusts.

What to do, and in what order

1. Establish the settlor's long-term residence position on a proper day count, including the tail if they have left or plan to leave.

2. Date the settlement, and date every addition to it. The 30 October 2024 line is per-transfer, not per-trust.

3. Confirm the US characterisation — grantor or non-grantor, and who the US beneficiaries are.

4. Model the next ten-year anniversary and any planned appointment on both sides before either is actioned.

5. Only then consider the levers — exclusion from benefit, distribution, unwinding, or managing the settlor's day count — and price each one in both currencies and both tax systems.

Where we fit

We look at a settlement from both sides at once: the UK status of the settled property at each chargeable event, and the US characterisation of the same trust in the same years, including the filings the settlor owes whatever the UK does. That is the only way to see whether a proposed fix on one side creates a larger problem on the other.

Every filing we prepare is reviewed and signed by a licensed professional — an IRS Enrolled Agent who is also ACCA-qualified — so one person holds both sides of the structure rather than two advisers corresponding through you. More on this work is on our US-UK private client tax hub; you can also see what it costs or book a consultation.

Rates, thresholds and day counts in this area have moved recently and may move again. Nothing here is advice on a particular trust, and the figures should be confirmed for your own facts and your own year before you act on them.

Frequently asked questions

Are excluded property trusts still effective for UK inheritance tax?+

They still work, but only while the settlor is not a long-term UK resident, and that is now tested at every chargeable event rather than fixed at the moment of settlement. Non-UK assets in a settlement are excluded property at times when the settlor is outside the long-term residence test and relevant property at times when they are inside it, so the same trust can move in and out of charge across its life. UK situs assets in a trust were never excluded property and are unaffected.

What does 'long-term resident' mean for UK inheritance tax purposes?+

It is a day-count test rather than a question of domicile: UK residence in at least 10 of the previous 20 tax years. It also persists for a period after someone leaves the UK — a minimum of a few tax years and a maximum of around a decade, scaled to how long they were resident — so the trust stays in charge through a tail that outlasts the move. Because this is a counting exercise against a specific year, confirm your own position on the actual residence record rather than an estimate.

Will my pre-2025 offshore trust be grandfathered?+

Partly, and the protection is narrower than it sounds. Property that was excluded property in the settlement immediately before 30 October 2024 carries transitional protection from the gift with reservation of benefit rules. Settlements made on or after that date get nothing, and — the point families miss — neither do additions to an older protected settlement. A later top-up of cash, shares or property is an addition, so the question before any further transfer is not whether the trust is protected but whether that transfer will be.

How do the UK changes interact with US grantor trust rules?+

They contradict each other. If the settlor is a US person and the trust is a grantor trust, the IRS treats it as transparent: income and gains are reported on the settlor's own return, Form 3520-A is filed as owner of a foreign trust, and the trust assets remain in the settlor's US taxable estate. From the moment the settlor becomes a long-term UK resident, HMRC treats the same trust as a separate chargeable entity with its own ten-year cycle and exit charges. The same assets are therefore in the settlor's estate for US purposes and inside the trust for UK purposes, with no credit running either way. This needs advice on the specific structure, not a general rule.

What happens to my trust if I leave the UK?+

Eventually the non-UK assets become excluded property again, once the long-term residence status and its tail have run out. But the transition itself is a chargeable event: coming out of the relevant property regime can trigger a proportionate exit charge, so emigrating to solve the problem may crystallise a charge on the way out. HMRC's Inheritance Tax Manual works through this at IHTM47022. The timing of a departure is worth modelling against the trust's ten-year cycle before the move, not after.