IHT changes for Excluded Property Trusts: opportunities and risks for US citizens in the UK
12 Feb 2026 • Inheritance Tax and Estate Planning • Personal Tax Planning for US-Connected Individuals • Personal Tax, Trusts and Probate • US/UK Tax
The UK’s inheritance tax (IHT) regime underwent significant reform in April 2025, shifting from a domicile‑based system to one based on long‑term residence. For US citizens living in the UK, the changes create new challenges, but they also bring meaningful planning opportunities through the US/UK Estate Tax Treaty.
Many internationally mobile individuals – including US citizens - use trusts as part of their long‑term estate planning, so these rule changes have a direct impact on how those structures operate. If you’d like a quick refresher on how UK tax residence interacts with inheritance tax exposure more broadly, you may find our insight How Tax Residence impacts your UK Inheritance Tax exposure helpful.
The April 2025 IHT reform: what changed?
Prior to April 2025, non-UK domiciled individuals could create “excluded property trusts” to keep certain non-UK assets outside the scope of UK IHT. This strategy was widely used by international clients, including US citizens relocating to the UK.
From 6 April 2025, the rules changed:
Individuals who have been UK resident for at least 10 out of the previous 20 tax years are now classified as long-term residents (LTR).
LTRs are subject to UK IHT on their worldwide estate at up to 40% on assets held at death.
Lifetime transfers will be subject to IHT at a rate of up to 20% and further IHT may be payable if the donor dies within seven years of the transfer.
Under the previous rules, a trust would usually keep its excluded property status for life, no matter how the settlor’s residence changed after the trust was created, so long as they were non‑domiciled at the time of settlement. This protection has now been removed for anyone who becomes a long‑term resident. As a result, many trusts that were historically outside the UK IHT net are now pulled into the far more complex Relevant Property Regime. This means:
10-year anniversary charges of up to 6% on the value of trust assets.
Exit charges on capital distributions, of up to 6% of the value distributed.
For US citizens who have become LTRs, trusts previously outside the UK IHT net may now face significant exposure to UK IHT.
Why the US/UK Estate Tax Treaty matters
Despite these domestic changes, the US/UK Estate Tax Treaty remains in force and offers valuable relief. Under Article 5(4) of the treaty:
The UK cannot impose IHT on property in a settlement if, at the time of settlement, the settlor was domiciled in the US and was not a UK national.
Trusts settled by US domiciliaries before they became UK citizens can remain outside UK IHT - even if the settlor later becomes an LTR.
Treaty protection applies to 10-year charges, exit charges, and gift-with-reservation rules.
For US citizens relocating to the UK, this creates a valuable planning window: trusts established while US domiciled and not UK nationals can permanently shelter non-UK assets from UK IHT.
Practical steps and risks
To benefit from treaty protection, a claim must be made on the IHT100 return for the relevant chargeable event (e.g., the 10-year anniversary). HMRC guidance references Form 742 for US certification, but this form does not exist in practice. The recommended approach is:
HMRC scrutiny: HMRC is expected to review treaty-based claims more closely now that excluded property trusts are dependent on the settlor’s ongoing residence history. Trustees should anticipate detailed questions about the settlor’s domicile status, residency, and the trust’s structure.
Domicile challenge: HMRC may dispute whether the settlor was US domiciled at the time of settlement. Robust evidence, such as a US domicile memorandum, is essential.
Increased compliance burden: Expect requests for supporting documentation, including trust deeds, domicile opinions, and correspondence with US advisers. Failure to provide adequate evidence could lead to denial of treaty relief and potential penalties.
Key Planning Points
Trusts should ideally be funded well before the settlor becomes a long‑term resident. Once LTR status is reached, UK entry charges can arise, so early planning is essential to preserve the intended IHT protections.
Choosing the right assets
Non‑UK assets remain the most suitable choice for both initial settlement and future holdings. Under the US/UK Estate Tax Treaty, certain UK assets can also be protected from IHT — for example UK shares, funds and cash — provided they are not UK land or UK business property. However, holding UK assets inside a trust can still create income tax complications. For that reason, it is generally preferable for the trust not to hold UK assets at all, even though some IHT protection may technically still apply.
Getting the structure right
For treaty protection to apply, the trust must qualify as a “settlement” under UK law. Many US‑style revocable trusts do not meet this definition in their standard form and may require adjustments to ensure they fall within the relevant UK rules.
Considering the beneficiaries
While assets remain within the trust, they are usually outside the beneficiaries’ estates for UK IHT purposes. However, once distributions are made, the assets received form part of the beneficiary’s own estate. This means timing and structuring distributions is an important part of long‑term planning.
Understanding income tax implications
The income tax position can vary depending on the trust’s residence status and when distributions are made. Both the trustees and the beneficiaries may face US and/or UK income tax charges, and these should be considered from the outset to prevent double taxation and ensure efficient long‑term planning.
Worked example: the 10-Year charge
Consider a trust created by a US citizen on 4 April 2018 while US domiciled and not a UK national. They have not previously made any transfers subject to UK IHT in the seven years prior to establishing the trust. The trust holds £10 million in non-UK assets and has made no distributions in the previous ten years.
Under UK domestic law, from 6 April 2025, the trust falls within the RPR as the settlor is LTR. The 10-year anniversary occurs on 4 April 2028, with the calculation below showing the tax that would normally be due, having removed the calculations to arrive at the ‘actual rate’ of tax.
Value of property | 10,000,000 |
Nil rate band available | (325,000) |
| 9,675,000 |
Actual rate | 5.805% |
Pro-rated for 12 quarters since April 2025 | 1.7415% |
Estimated charge | £174,150 |
However, if treaty protection applies, this charge is eliminated - saving £174,150 of tax.
What this means for US citizens in the UK
The abolition of excluded property trusts marks a turning point for international estate planning. For US citizens in the UK, the US/UK Estate Tax Treaty offers a valuable safeguard, but only where trusts are properly structured and robustly documented. Making a clear treaty claim on the IHT100 is essential. Given HMRC’s likely scrutiny of these arrangements, specialist advice is critical to manage risk, support domicile analysis, and ensure compliance with evolving anti-avoidance rules.
For tailored advice on US/UK estate planning and trust compliance under the new IHT regime, please contact our US/UK and Private Client teams. We can guide you through treaty claims, HMRC reporting, and strategic planning to protect your wealth.
