forbes.com
UK Finance Act 2025: Residence-Based Taxation and Impact on Trusts
The UK's Finance Act 2025, effective April 6, 2025, replaces the non-domiciled tax regime with a residence-based system, taxing UK residents of over four years on global income and subjecting revocable trusts holding non-UK assets to a 40% inheritance tax.
- How does the UK's Finance Act 2025 alter estate planning strategies, particularly for those using US revocable trusts?
- This change significantly impacts non-domiciled individuals and revocable trusts commonly used in US estate planning to avoid probate. The abolition of 'excluded property trusts' exposes these trusts to a 40% IHT on non-UK assets held within them, altering estate planning strategies for UK residents.
- What are the long-term implications of this legislation on cross-border estate planning and tax compliance between the US and UK?
- The new residence-based tax system and the elimination of excluded property trusts will likely lead to increased tax burdens for certain high-net-worth individuals and necessitate a review of existing estate planning structures to minimize IHT liabilities. US citizens using revocable trusts for estate planning will need to consider the UK tax implications.
- What are the immediate consequences of the UK's new residence-based tax system for non-domiciled individuals and US revocable trusts?
- The UK's Finance Act 2025 replaces its non-domiciled tax regime with a residence-based system from April 6, 2025, taxing residents for over four years on worldwide income. A four-year exemption exists for new residents meeting specific criteria, but revocable trusts holding non-UK assets are now subject to UK inheritance tax (IHT).
Cognitive Concepts
Framing Bias
The article frames the changes as primarily negative, focusing heavily on the increased tax burden on non-domiciled individuals, particularly those utilizing US revocable trusts. While it acknowledges the 4-Year Foreign Income and Gains Regime, it doesn't adequately highlight its potential benefits or explore alternative planning strategies that could lessen the impact of the changes. The headline (if there was one) and introduction likely reinforced this negative framing.
Language Bias
The language used is generally neutral and objective, though the repeated emphasis on the negative aspects of the tax changes might be interpreted as slightly loaded. Phrases such as "abolishing" and "exposing to IHT as high as 40%" contribute to this negative framing. More neutral alternatives could include "replacing" and "subjecting to IHT, with a maximum rate of 40%".
Bias by Omission
The analysis lacks information on the potential impact of these changes on different groups of non-domiciled individuals. It focuses heavily on the impact on US citizens using revocable trusts, but doesn't discuss the effects on other nationalities or types of trusts. Additionally, there is no discussion of the potential social or economic consequences of these changes, such as their effects on investment in the UK or the potential for increased tax avoidance through other means.
False Dichotomy
The analysis presents a somewhat simplified view of the tax implications, focusing primarily on the dichotomy of 'domicile vs. residence'. It does not adequately explore the complexities of international tax treaties and their potential to mitigate some of the negative effects of the new regime. The description of the US revocable trust as a simple solution to avoid probate, without acknowledging potential downsides or alternative methods, is also an oversimplification.
Sustainable Development Goals
The new tax regime may disproportionately affect certain groups, potentially increasing inequality. The abolition of excluded property trusts and the introduction of a residence-based tax system could place a heavier tax burden on non-domiciled individuals, particularly those with assets held in trusts, exacerbating existing inequalities.