Offshore trusts in 2025: why they rarely work for UK residents, and what to do instead

Offshore trusts have long been marketed as tools to reduce UK tax, protect wealth, and provide privacy. However, as of 2025, for most UK residents these structures deliver few, if any, of the promised benefits — and can create costly compliance and tax risks.

If you are considering an offshore trust or already have one, all is not lost. There are more effective, compliant strategies to protect your wealth and reduce tax exposure.

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The allure of offshore trusts: what people expect

Offshore trusts are often promoted for:

Reducing or eliminating inheritance tax (IHT)
Protecting assets from creditors, divorce or political risk
Minimising income tax and capital gains tax on worldwide assets
Providing enhanced privacy and discretion

These aims are understandable. Many people are simply looking for legitimate, efficient ways to safeguard what they have built and provide for future generations.

If you are serious about protecting your assets, the structure must match the strategy.

Offshore trusts may once have worked for UK residents, but the rules have changed. Today, using the wrong structure can create unnecessary complexity, compliance burdens and tax exposure.

We help successful individuals and families design smarter, fully compliant solutions that support their long-term goals — without relying on outdated assumptions.

If you are reviewing your position, expert advice now could make all the difference.

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The reality in 2025: why offshore trusts rarely work for UK residents

Anti-avoidance rules: The UK has introduced strict legislation to counter perceived offshore avoidance. Offshore trusts are caught by measures such as the Transfer of Assets Abroad (TOAA) rules, the settlor-interested trust rules, and complex reporting requirements.

Inheritance tax traps: An offshore trust does not remove UK assets from your estate for IHT purposes, and foreign assets in a trust are still within scope if the settlor is UK domiciled or deemed domiciled.

Income and gains: If you set up or benefit from an offshore trust, you may still be taxed on its income and gains as though you own them directly.

Compliance and costs: Offshore trusts attract extensive reporting requirements under FATCA, CRS and UK-specific rules. Annual maintenance can be costly and burdensome, often outweighing any perceived benefit.

Risk of HMRC scrutiny: Offshore structures are red flags for HMRC, increasing the chance of an enquiry.

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Common misunderstandings we see

We often encounter misunderstandings about offshore trusts. One of the most common is the belief that placing UK situs assets into an offshore trust removes them from the scope of inheritance tax. In reality, for UK-domiciled or deemed domiciled individuals, these assets remain firmly within the UK tax net, and the trust provides no such shelter.

Another frequent misconception is that offshore structures are somehow invisible to HMRC. In fact, modern global reporting requirements — including the Common Reporting Standard (CRS), FATCA, and UK-specific disclosure rules — ensure that offshore arrangements are more visible than ever before.

There is also a lingering perception that offshore trusts are a standard, effective tool for UK tax planning, when in reality recent legislative changes mean they often create more tax problems than they solve.

Finally, some people overestimate the privacy benefits of offshore structures, not realising that the combination of international information-sharing agreements and HMRC’s investigative powers means genuine confidentiality is very limited in practice.

Explore Our Guide to Inheritance Tax Planning

What actually works: smarter alternatives to offshore trusts

All is not lost — there are strategies that provide the protection and efficiency people seek, without unnecessary risk or cost:

UK-based trust planning: Discretionary trusts, life interest trusts or family investment companies can deliver protection and tax efficiency within UK law.
Pension and investment structures: UK pensions and certain life policies offer protection from inheritance tax, income tax and capital gains tax in a compliant way.
International solutions (where appropriate): For non-UK residents, or for specific assets outside the UK, there may still be a role for offshore structures.

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Who we help

We help individuals returning to the UK who want clarity on how to structure their affairs, successful families looking to protect wealth for future generations, people who have existing offshore structures and want to unwind them safely, and investors planning significant transactions who want to get it right first time.

Why work with Tax Innovations?

Our service is senior-led and discreet. We offer solutions that stand up to HMRC scrutiny, clear advice on what works today — and what no longer does, and a bespoke approach designed around your objectives.

FAQ

What are the tax implications of an offshore trust in the UK?

Offshore trusts can still reduce UK inheritance tax and shield foreign income or gains — but only in limited situations. For example, excluded property trusts remain effective for non-UK domiciled individuals settling non-UK assets. However, for UK residents or deemed domiciled individuals, the tax treatment is far more complex and often unfavourable.

How are offshore trust distributions taxed for UK residents?

Distributions from an offshore trust to a UK resident may be subject to income tax or capital gains tax, depending on the source and nature of the funds. Anti-avoidance legislation, including the transfer of assets abroad rules and matching rules, may significantly increase tax exposure if the trust is not carefully structured.

Do offshore trusts still offer inheritance tax benefits?

Yes — but only under specific conditions. Offshore trusts can still offer inheritance tax protection when used by non-domiciled individuals before becoming deemed domiciled in the UK. For those already deemed domiciled, the benefits are largely lost unless pre-existing excluded property trusts are already in place.

Are offshore trusts legal in the UK?

Yes. Offshore trusts are fully legal and remain a recognised tool in international estate planning. However, UK tax legislation imposes strict rules on their use. Without careful planning, UK-resident settlors or beneficiaries may face punitive tax charges or reporting requirements.