The excluded property trust cap protects almost no one

The relief that turned out to be a mirage

The five million pound cap protects almost no one, and the trustees who were told it protects them are the ones I most want to reach. The conversation has a pattern by now. A settlor or a trustee read that the 2025 reforms came with a cap on the inheritance tax a formerly excluded property trust can suffer, set at five million pounds over each ten-year cycle, and they exhaled.

The number sounds generous. It sounds like the government looked at the damage the reforms would do to long-standing offshore trusts and decided to limit it. So they filed the worry away, and they carried on.

Then they send me the trust's balance sheet, and I do the only piece of arithmetic that matters, and the relief they were counting on evaporates in front of them.

Here is why, and I want to be very plain about it, because it is the whole article in one line. The ten-year charge on a relevant property trust is capped, as a rate, at six per cent of the value above the nil-rate band. If the most the trust can be charged in a cycle is six per cent, then a cap that limits the tax to five million pounds only does anything once six per cent of the trust is more than five million pounds. Five million divided by six per cent is roughly eighty-three million.

So unless the trust is worth more than about eighty-three million pounds, the six per cent charge never reaches five million, the cap is never touched, and it protects nothing. The cap is real. It is just aimed at a tier of wealth that almost none of the affected trusts occupy. So...

How a legacy trust ended up in the net at all

A legacy excluded property trust is caught now because the connecting factor for inheritance tax changed from domicile to residence on 6 April 2025. For decades the logic was simple and durable: foreign assets settled into a trust by a settlor who was not UK domiciled were excluded property, outside the UK inheritance tax net, and they stayed outside it more or less permanently. That is the immunity the whole offshore-trust industry was built on, and it is the immunity that ended.

Under the long-term resident regime, a settlor who has been UK resident for at least ten of the last twenty years is a long-term resident, and the foreign assets of a trust they settled are no longer excluded property while that status holds.

The trust falls into the relevant property regime that governs ordinary discretionary trusts, with its ten-year anniversary charges and its exit charges. I have set out the mechanics of that shift and the way it follows a departing settlor in the long-term resident inheritance tax tail analysis, and the wider dismantling of the protections these trusts relied on in the protected settlements after April 2025 analysis. This article is not about how the trust was caught, and it is not the full keep, collapse or re-home decision, which I have set out in the transparent trust restructuring analysis. It is about the two things that changed after that was written and that quietly decide the numbers now: what the five million pound cap does and does not do, and the situs rule that closes the obvious escape.

The arithmetic that decides everything

The entire question turns on one division, and it is worth doing slowly because so much money rides on it. The relevant property regime charges a maximum of six per cent of the chargeable value on each ten-year anniversary. The cap the reforms introduced limits the charge to five million pounds over a ten-year cycle, and for shorter periods it works pro rata, at one hundred and twenty-five thousand pounds per quarter.

To find the point where the cap first does something, you ask at what trust value six per cent equals five million pounds.

Six per cent of eighty-three and a third million is five million. That is the break-even. Above roughly eighty-three million pounds, the uncapped charge would exceed five million, so the cap steps in and saves the excess. At exactly that value the cap and the charge meet. And below it, which is where the overwhelming majority of these trusts sit, the six per cent charge produces a number smaller than five million, the cap is never reached, and it is as if the cap did not exist.

A forty million pound trust faces up to about two and a half million on each anniversary and the cap is a spectator.

A twenty million pound trust faces up to about one point two million and, again, the cap watches from the sidelines. There is no version of the arithmetic in which a trust below the break-even benefits, because the cap limits a charge that was never going to reach the limit.

This is why I call it a mirage rather than a relief. It is genuinely useful, but only to a settlor with a trust larger than most family fortunes, and, as the advisers who drafted around it have noted, most settlors with trusts that size left the UK before the reforms took effect precisely so that none of this would apply to them. The cap protects the people who least need it and were least likely to still be here.

The numbers, trust by trust

The table runs the same calculation across a range of trust values so the pattern is impossible to miss. It assumes the maximum six per cent ten-year charge on the value, before the nil-rate band and the detail of the computation, which reduce the real figure slightly but do not change the shape.

Read down the third column and the story is a row of noes until you reach a value larger than almost every trust in the country. The cap is the last row. Everything above it, meaning everything smaller, pays the charge in full.

If you take one thing from this piece, take the third column, because it is the answer to the question most trustees are actually asking without realising it, the cap does nothing for me.

What this means below eighty-three million

If your trust is below the break-even, the cap is irrelevant and the real decision is what to do about a charge that now recurs every decade. This is where the reassurance has to give way to planning, because doing nothing has a price and the price compounds. A trust caught by the regime faces up to six per cent of its value above the nil-rate band every ten years, and a proportionate exit charge each time assets are distributed out.

On a thirty million pound trust that is up to something close to one point eight million pounds a decade, and again on the next anniversary, and the one after that. Over a generation the relevant property regime can take a very large bite out of a trust that its settlor believed was permanently outside the net.

So the question is no longer whether the cap saves you, because below the line it does not. The question is whether keeping the trust intact is worth paying the periodic charge for what the trust still does for the family, or whether the trust has outlived the purpose it was built for and should be restructured or unwound.

That is a genuine decision with several defensible answers, and it is the one worth spending the professional time on, rather than the false comfort of a cap that was never going to reach you.

The keep, collapse or re-home framework in full, with the income and gains side and the Temporary Repatriation Facility, is set out in the transparent trust restructuring analysis; what follows here is the specific question the cap and the situs rule add to it, which is whether moving the wealth out is worth the exit cost.

Moving to a UAE foundation, and the trap that guards the exit

The instinct once the arithmetic lands is to move the assets somewhere they are not taxed, usually a UAE foundation, and that instinct now runs straight into a rule built to stop it. I understand the appeal. A DIFC or ADGM foundation is a genuinely good home for family wealth, it sits in a jurisdiction with no inheritance tax, and it can carry the succession and firewall functions a family wants, as I have set out in the foundation against family investment company and trust analysis and the DIFC and ADGM foundations analysis. The problem is not the destination. The problem is the cost of the move, and a specific rule that now guards the door.

Start with the move. Taking assets out of a UK-relevant-property trust to put them into a foundation is not an administrative migration; it is a set of taxable events happening at once. There can be a capital gains disposal by the trustees on the assets leaving, taxed as a disposal at market value. There is an inheritance tax exit charge under the relevant property regime, proportionate to the time since the last ten-year anniversary.

And where the value ends up benefiting a UK-resident settlor or beneficiary, the onward-benefit charges under section 643A ITTOIA 2005 or section 731 ITA 2007 can apply. The exit is frequently more expensive, in a single year, than a decade of simply paying the periodic charge, which is exactly why it cannot be decided on instinct.

Then there is the door itself. The obvious clever move, to wait until the settlor stops being a long-term resident and then take the assets offshore free of charge, has been anticipated and closed. A rule in force from 26 November 2025 imposes an inheritance tax charge where the situs of a trust's assets is changed from UK to non-UK after the settlor has ceased to be a long-term resident and no charge arose at that point. In plain terms, you cannot bring the assets onshore to sit out the settlor's residence tail and then quietly move them back offshore once the tail expires. The round-trip triggers the very charge it was designed to avoid. Genuine commercial changes in the assets are a different matter, and trustees should document the reasons for any change in composition, but the escape route that looked obvious on a whiteboard is now a taxable event.

The decision that settles it

Whether to keep, collapse, migrate or distribute a caught trust is settled by the numbers and the family's mobility, not by the comfort of a cap that does not reach you. There are really four honest options, and the right one is a function of arithmetic rather than instinct. Keep the trust and pay the periodic charge, where what it does for the family justifies the cost. Collapse it now and accept a single exit charge, where its original purpose has lapsed and the ongoing charge is not worth paying. Migrate the settlor genuinely out of UK residence and run the long-term resident tail, where the family's life supports a real departure, a path that pairs with the pre-exit year analysis and the UAE individual tax residency rules. Or distribute in a planned sequence while the charges are tolerable. Each is defensible on the right facts, and each requires the numbers to be modelled before a decision, not after.

What is not defensible is doing nothing because a headline number sounded reassuring. The five million pound cap is not protection for a thirty million pound trust. It is a line on a page that applies to somebody wealthier, and mistaking it for a shield is how a family pays six per cent a decade while believing they are covered. The cap is real. Your entitlement to it, below eighty-three million pounds, is not.

Frequently asked questions

What is the £5 million cap on excluded property trusts?

It is a limit, introduced by the 2025 Autumn Budget with effect from 6 April 2025, on the inheritance tax that a formerly excluded property trust can suffer under the relevant property regime, set at five million pounds over each ten-year cycle and at one hundred and twenty-five thousand pounds per quarter for shorter periods. It applies to trusts that held excluded property on 30 October 2024 and continue to hold non-UK assets at the time of the charge. It caps the tax, not the value of the trust, which is why its usefulness depends entirely on how large the trust is.

Why does the cap only help trusts worth more than about £83 million?

Because the ten-year charge is itself capped at six per cent of value, and six per cent of about eighty-three and a third million pounds is five million pounds. Below that value, six per cent of the trust produces a figure smaller than five million, so the five million pound cap is never reached and does nothing. Above it, the uncapped charge would exceed five million, so the cap steps in and limits the excess. The break-even is simply five million divided by six per cent, and it lands at a value larger than the great majority of affected trusts.

My trust is worth £30 million, does the cap protect me?

No. A thirty million pound trust faces up to six per cent of its value above the nil-rate band on each ten-year anniversary, which is up to roughly one point eight million pounds, comfortably below the five million pound cap. Because the charge never approaches five million, the cap has no effect on your trust at all. The planning question for a trust of that size is not how to use the cap, which you cannot, but whether to keep paying the periodic charge, restructure, or unwind, based on what the trust still achieves for the family.

Why is my old excluded property trust taxed now when it never was before?

Because inheritance tax moved from a domicile basis to a residence basis on 6 April 2025. Foreign assets settled by a non-UK-domiciled settlor used to be excluded property and stayed outside the net. Under the new rules, where the settlor is a long-term resident, meaning UK resident for at least ten of the last twenty years, the trust's foreign assets are no longer excluded property and fall into the relevant property regime with its ten-year and exit charges. The immunity was a function of domicile, and domicile is no longer the test.

Can I just move the trust assets to a UAE foundation?

You can, but it is a set of taxable events rather than a simple transfer, and one obvious version of it is now blocked. Taking assets out of the trust can trigger a trustee capital gains disposal, an inheritance tax exit charge, and onward-benefit charges under section 643A ITTOIA 2005 or section 731 ITA 2007. In addition, a rule in force from 26 November 2025 charges inheritance tax where assets are moved from UK to non-UK situs after the settlor stops being a long-term resident, which closes the plan of bringing assets onshore and later taking them offshore. A migration can still make sense, but only once the full exit cost is modelled.

What is the situs anti-avoidance rule from 26 November 2025?

It is a rule that prevents a specific escape. Without it, a trustee could bring the trust's assets into the UK while the settlor was still a long-term resident, wait for the settlor's long-term resident status to end with no charge arising at that point, and then move the assets back offshore free of inheritance tax. The rule imposes an inheritance tax charge on that later change of situs from UK to non-UK, so the round-trip triggers the charge it was designed to avoid. Genuine commercial changes in asset composition are treated differently, and the reasons for any change should be documented.

Is it better to collapse the trust or keep paying the charge?

It depends entirely on the numbers and on what the trust still does for the family. Keeping the trust means paying up to six per cent every ten years plus exit charges, which is worth it only if the trust's protection, governance or succession function justifies the cost. Collapsing it means a single exit charge now and the end of the periodic charges, which suits a trust whose original purpose has lapsed. The decision requires the periodic cost over the family's likely horizon to be modelled against the one-off cost of unwinding, and there is no general answer that holds without the figures.

Does moving abroad stop the charges on the trust?

It can, but only if the settlor genuinely ceases to be a long-term resident, and even then the timing and the situs rule matter. Once the settlor is no longer a long-term resident, the trust's foreign assets can fall back outside the relevant property regime, but the long-term resident status has a tail that runs for a period after departure, and the 26 November 2025 rule prevents using an onshore-then-offshore move to accelerate the exit.

A genuine relocation, properly sequenced, can end the exposure, but it has to be a real change in the settlor's life rather than a paper departure.

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Critical advisory. The five million pound cap is the most quietly misunderstood part of the 2025 reforms, because it offers reassurance to exactly the families it does not help, and reassurance is the enemy of the planning these trusts now need.

Whether your trust benefits from the cap, what the periodic charge will actually cost it over the years ahead, and whether keeping, collapsing, migrating or distributing is the right answer all depend on the trust's value, its assets and their situs, the settlor's residence history and intentions, and the purpose the trust still serves, and this is an area where draft and recently enacted legislation should be confirmed against your own facts before you act.

Modelling the real numbers for your trust, and planning the route that costs the least over the family's horizon rather than the one that sounds safest, is work we do in-house across the UAE, the United Kingdom and Ireland. If you hold or advise a legacy offshore trust and you were told the cap protects you, send us the balance sheet and let us run the one calculation that decides it, before another ten-year anniversary arrives.

This article is general information and not legal or tax advice, and your own position should be confirmed against your specific facts before you act...