US and UK Tax Advisors Ten-Year Trust Charge Explained |

US and UK Tax Advisors Ten-Year Trust Charge Explained |

US and UK Tax Advisors: Ten-Year Trust Charge Explained

US and UK Tax Advisors on the Tenth Anniversary Charge

An offshore trust that holds investment assets for UK-resident US-citizen beneficiaries faces a tenth anniversary charge under UK inheritance tax law — a periodic charge of up to 6% of the trust's relevant property value that arises on every tenth anniversary of the trust's creation and that catches many HNW families by surprise when their Jersey or Guernsey family trust reaches its first decade. Furthermore, the same trust creates a simultaneous set of US reporting obligations that the offshore trustees typically do not manage — including Form 3520-A (the annual information return that the trust itself must file with the IRS), Form 3520 (the US person's annual return reporting the trust relationship), and the FBAR for the trust's foreign financial accounts where the US-citizen beneficiary has a financial interest. Consequently, US and UK tax advisors who work across both the UK IHT periodic charge regime and the US foreign trust reporting regime find that the tenth anniversary year is often the moment when the dual non-compliance becomes impossible to ignore, since the UK trustees are required to file an IHT100 return and pay the periodic charge. This UK compliance event creates a paper trail connecting the trust to its UK-connected beneficiaries.

This article is written for UK-resident US citizens who are beneficiaries or settlors of offshore trusts — whether in Jersey, Guernsey, the Isle of Man, the Cayman Islands, or other non-UK structures — that hold investment assets and are approaching or have passed the tenth anniversary. By the end of this guide, you will understand how the UK periodic charge is calculated, what the simultaneous US reporting obligations are, and how US and UK tax advisors manage both compliance streams simultaneously when the ten-year charge falls due.

What Are US and UK Tax Advisors in Trust Contexts?

US and UK tax advisors in the offshore trust context are cross-border tax professionals who understand both the UK's relevant property trust regime under the Inheritance Tax Act 1984 and the US foreign trust reporting rules under IRC Sections 679, 6048, and 6677. Furthermore, this requires dual expertise that very few practitioners hold — since UK trust tax specialists typically advise on the IHT periodic charge and exit charge without reference to the US reporting consequences of the same trust. US international tax practitioners advise on Form 3520, Form 3520-A, and PFIC issues within the trust, without understanding how the UK periodic charge is calculated. Specifically, the most important practical function of US and UK tax advisors for an offshore trust with UK-resident US-citizen connections is to ensure that the UK IHT100 return for the ten-year charge and the US Form 3520-A annual filing are prepared with consistent information about the trust's assets, values, and distributions — since inconsistencies between the two filings create significant audit risk in both jurisdictions.

The HMRC guidance on the IHT periodic charge for relevant property trusts is at https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm42161. The IRS guidance on foreign trust reporting and Form 3520 is at https://www.irs.gov/forms-pubs/about-form-3520.

Why the Ten-Year Charge Matters More in 2026

The Post-April 2025 Non-Dom Trust Rule Changes

The abolition of the UK's non-domicile tax regime from April 2025 fundamentally changed the UK IHT treatment of offshore trusts settled by formerly non-domiciled individuals. Furthermore, offshore trusts settled by individuals who were not UK-domiciled at the time of settlement were previously excluded from the UK's relevant property trust periodic charge where the trust assets remained as excluded property — broadly, assets situated outside the UK held by a non-domiciled settlor. Specifically, from April 2025 under the new residence-based regime, the excluded property status of offshore trust assets is determined by the long-term residence status of the settlor rather than their domicile — meaning that offshore trusts settled by individuals who became UK long-term residents before the regime change may have had their excluded property status removed, bringing previously uncharged trust assets into the relevant property trust periodic charge regime for the first time. Consequently, a US-citizen settlor who has been a UK resident for more than ten years and who established an offshore trust before 2015 may be facing a first ten-year charge under the new rules on assets that were previously entirely outside the UK IHT charge. The HMRC guidance on the new residence-based IHT rules and trust changes is at https://www.gov.uk/government/publications/changes-to-the-taxation-of-non-uk-domiciled-individuals.

The US Form 3520-A Penalty Exposure for Offshore Trusts

Form 3520-A is the annual information return that the trustee of a foreign trust must file with at least one US person who is treated as the owner of any portion of the trust or who has an interest in the trust. Furthermore, the penalty for failure to file Form 3520-A is the greater of $10,000 or 5% of the gross value of the portion of the trust assets treated as owned by a US person. This penalty compounds for each year of non-filing and can reach very large amounts for significant offshore trust structures. Consequently, an offshore trust with $2 million of assets in which a UK-resident US citizen is a discretionary beneficiary has a theoretical Form 3520-A penalty exposure of $100,000 per year of non-filing — making the ten-year anniversary, when the UK IHT compliance activity draws attention to the trust, also the moment when the accumulated US penalty exposure becomes an urgent priority to address. According to https://www.aicpa.org, foreign trust reporting compliance for US-connected offshore trusts is one of the highest-priority areas in international tax enforcement for 2026.

The FATCA Reporting of Trust Assets by Offshore Trustees

Offshore trust companies — acting as trustees of Jersey, Guernsey, and Cayman trusts — are financial institutions for FATCA purposes and are required to identify US-person beneficial owners and beneficiaries and report those accounts to the relevant authority under the applicable IGA. Furthermore, where a UK-resident US citizen is a discretionary beneficiary of an offshore trust managed by a Channel Islands trust company, the trustee is required to report the beneficiary's interest to HMRC under the UK-FATCA IGA, which then exchanges the data with the IRS as part of the annual FATCA information exchange. Consequently, a US-citizen beneficiary of an offshore trust who has never reported the trust interest on a US return — including Form 3520, FBAR, and Form 8938 — has likely had the trust interest reported to the IRS through the trustee's FATCA compliance program, creating a data trail that connects the IRS to the unreported foreign trust interest.

How the UK Ten-Year Periodic Charge Is Calculated

The Relevant Property Trust Regime

The UK's relevant property trust regime under Chapter III of Part III of the Inheritance Tax Act 1984 applies to discretionary trusts and certain accumulation and maintenance trusts, imposing a periodic charge at every tenth anniversary of the trust's creation and an exit charge proportional to the periodic charge rate where property leaves the trust between anniversaries. Furthermore, a trust's relevant property comprises all property included in the trust that does not qualify as excluded property — broadly, property that is either UK-situated or has lost its excluded property status due to the settlor's residence position. Additionally, the periodic charge rate is calculated as a fraction of the lifetime rate of IHT — 20% — applied to the chargeable value of the relevant property, with the fraction determined by the number of complete quarters between the trust's creation and the tenth anniversary divided by forty, producing a maximum effective IHT rate of 6% (thirty-six fortieths of 20% applied to the excess above the nil-rate band) on property that has been in the trust for the full ten years. Consequently, a ten-year-old offshore trust with relevant property of £2 million — where the nil-rate band of £325,000 is available — has a chargeable value of £1,675,000, and the maximum periodic charge at 6% is £100,500 of UK IHT due on the anniversary date.

The Nil-Rate Band Allocation in Trust IHT Calculations

The nil-rate band available for the trust's ten-year charge calculation is reduced by the amount of chargeable transfers made by the settlor in the seven years before the trust was created — since those transfers use part of the nil-rate band before the trust can access it. Furthermore, for a U.S. citizen settlor who made other gifts or settled other trusts in the seven years before establishing the offshore trust, those prior transfers reduce the nil-rate band available for the trust calculation and increase the effective periodic charge rate on the trust's assets. Additionally, the nil-rate band used in the trust calculation is the nil-rate band at the date of the ten-year anniversary — currently £325,000 for 2025-26 — not the nil-rate band at the date the trust was created, which can affect the calculation where the nil-rate band has changed over the ten years.

The US Settlor's Position Under IRC Section 679

Where a US-citizen settled an offshore trust after 5 March 1984, and the trust has one or more US beneficiaries, the trust is automatically a grantor trust for US tax purposes under IRC Section 679 — meaning the US settlor is treated as the owner of the entire trust for US income tax purposes and must include all of the trust's income and gains in their US gross income each year. Furthermore, for a UK-resident US citizen who settled an offshore trust, the grantor trust classification under Section 679 means that the trust's annual income — dividends, interest, capital gains — is US-taxable to the settlor in the year it arises, not in the year the trust makes a distribution. Additionally, the Section 679 grantor trust treatment is separate from the PFIC classification of the trust's underlying investments — where the trust holds PFIC funds, the grantor-owner must still make QEF or mark-to-market elections for each PFIC holding, since the grantor trust rules pass through the PFIC character of the trust's investments to the settlor. Consequently, an offshore trust that generates £80,000 of annual investment income and capital gains creates both a UK IHT periodic charge at the tenth anniversary and an annual US income tax obligation for the US-citizen settlor — obligations that experienced US and UK tax advisors must address in both jurisdictions simultaneously.

Managing the Ten-Year Charge for US-Connected Trusts: Steps

Step 1 — Confirm the trust's UK IHT position and excluded property status.

Obtain the trust deed, letter of wishes, and asset schedule from the offshore trustees and confirm whether the trust's assets constitute relevant property subject to the UK periodic charge or excluded property exempt from it. Furthermore, apply the post-April 2025 residence-based IHT rules to confirm whether any previously excluded property has become relevant property as a result of the settlor's long-term residence status — since this is the primary change affecting offshore trusts with UK-resident US-citizen settlors in 2026. Additionally, confirm the date of the trust's creation and each subsequent ten-year anniversary to determine when the periodic charge is due and whether the current year is an anniversary year that requires an IHT100 return to be filed with HMRC. The HMRC IHT100 guidance is at https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm10851.

Step 2 — Calculate the UK periodic charge and prepare the IHT100 return.

Obtain current valuations of all relevant property in the trust as at the tenth anniversary date and calculate the periodic charge using the relevant property trust formula — the chargeable value above the nil-rate band (reduced by the settlor's prior transfers in the seven years before the trust) multiplied by thirty-six fortieths of 20%. Furthermore, prepare the IHT100 return disclosing the trust's assets, the anniversary date, the chargeable value, and the tax computation, and submit it to HMRC with the periodic charge payment within six months of the anniversary date. Additionally, obtain the HMRC Form D32 receipt confirming the IHT100 has been accepted, since this document forms part of the supporting evidence for the US return's foreign tax credit for the UK IHT paid on the trust assets.

Step 3 — Confirm the Form 3520-A and Form 3520 filing history.

Review the trust's US filing history to confirm whether the trustee has filed Form 3520-A for each year of the trust's existence, and whether Form 3520 has been filed by the US-citizen settlor or beneficiaries for each year. Furthermore, where Form 3520-A has not been filed for prior years, the correction route depends on whether the grantor trust rules under IRC Section 679 apply — since a Section 679 grantor trust has the US settlor responsible for ensuring Form 3520-A is filed, rather than the foreign trustee. Additionally, engage the offshore trustees in the US reporting process as early as possible, since obtaining the trust's financial data — income statement, balance sheet, and distribution records — in a format suitable for Form 3520-A preparation requires trustee cooperation and advance planning. The IRS Form 3520-A instructions are at https://www.irs.gov/forms-pubs/about-form-3520-a.

Step 4 — Assess the PFIC position of the trust's investments.

Review the trust's investment portfolio to identify any non-US-domiciled funds — OEICs, unit trusts, SICAVs, investment trusts — that are passive foreign investment companies for US tax purposes, since the grantor trust's income from PFIC holdings must be reported through the Form 8621 PFIC election framework. Furthermore, where no QEF or mark-to-market election has been made for prior years of PFIC ownership within the trust, the retroactive correction using the mark-to-market method through the streamlined procedures is the standard approach — treating each year's increase in PFIC value as ordinary income to the grantor settlor in the year of accrual. Additionally, the ten-year anniversary provides a practical inflection point for establishing a comprehensive annual compliance program for the trust's PFIC holdings, since the IHT100 filing process requires a current valuation of all trust assets that can also serve as the basis for the Form 8621 mark-to-market calculation for the anniversary year.

Step 5 — Report the trust interest on FBAR and Form 8938.

Include the offshore trust's financial accounts — brokerage accounts, bank accounts, cash holdings — in the US-citizen settlor's or beneficiary's annual FBAR if the accounts exceed $10,000 and the US person has a financial interest in or signature authority over them. Furthermore, include the trust's total asset value as a specified foreign financial asset on Form 8938 where the settlor's aggregate specified foreign financial assets exceed the applicable threshold — $200,000 at year-end or $300,000 at any point for filers living outside the United States. Additionally, confirm whether the trust itself has a US taxpayer identification number — since the Form 3520-A must include the trust's EIN — and obtain an EIN from the IRS for the trust where one has not previously been established. The FBAR guidance is at https://www.fincen.gov/financial-crimes-enforcement-network/fbar.

Case Study: US Citizen in Surrey, Ten-Year Trust Charge

Our team was engaged by a US citizen who had lived in Surrey for sixteen years and who was the settlor and a discretionary beneficiary of a Jersey family trust established in 2015 to hold an investment portfolio of approximately £1.8 million. The trust was approaching its first ten-year anniversary in 2025. The offshore trustees — a Jersey trust company — had managed the trust's UK IHT compliance on previous occasions but had not filed Form 3520-A for any year, and the client had not filed Form 3520 or included the trust on FBAR or Form 8938 for any year since the trust's establishment. The trust's investment portfolio held a mix of UK gilts, Irish-domiciled bond funds, and a Guernsey-domiciled equity fund — all PFIC for US purposes.

After reviewing the trust structure and the post-April 2025 IHT rule changes, we confirmed that the settlor's long-term residence in the UK — more than ten years — meant that the trust's assets were no longer excluded property under the new residence-based regime, bringing the full £1.8 million portfolio into the relevant property periodic charge calculation. Furthermore, the nil-rate band available for the trust calculation was reduced by £120,000 of lifetime gifts made by the settlor in the seven years before the trust was established in 2015, leaving an available nil-rate band of £205,000 for the periodic charge calculation. Additionally, the chargeable value was £1.595 million (£1.8m minus £205,000), and the periodic charge at thirty-six fortieths of 20% produced a UK IHT charge of approximately £57,420 due to HMRC within six months of the anniversary date.

For the US position, we confirmed the trust was a Section 679 grantor trust — since the client was a US citizen who settled it after 1984 and had US-person beneficiaries — making the client responsible for reporting all trust income annually on the US return. Furthermore, we prepared retroactive Form 3520-A filings for the ten years of the trust's existence, reporting the trust's income and asset values for each year, and simultaneously prepared the client's Form 3520 for the same years. Additionally, Form 8621 mark-to-market elections were made retroactively for the Irish-domiciled bond funds and the Guernsey equity fund, producing annual mark-to-market income inclusions across the ten years of approximately $18,400 per year based on the average annual growth of the PFIC holdings. The UK IHT of £57,420 — converted at the anniversary-date exchange rate — was claimed as a foreign tax credit on the trust's grantor-year US return for the anniversary year, providing a partial offset against the US income tax on the trust's deemed income for that year.

Common Mistakes with Offshore Trusts and UK-Resident US Citizens

Mistake 1 — Not Recognising the Trust as a US Grantor Trust

The most consequential mistake is failing to recognize that an offshore trust settled by a US citizen after 5 March 1984 with US-person beneficiaries is automatically a Section 679 grantor trust — making the settlor responsible for reporting all trust income annually on their US return, regardless of whether any distribution was received. Furthermore, the Section 679 grantor trust classification applies even where the settlor is a discretionary beneficiary rather than a fixed-income beneficiary, and even where the trustee has complete discretion over distributions. The correct approach requires a US tax opinion on the trust's grantor trust status within the first year of establishment, with annual reporting thereafter. IRS grantor trust guidance is at https://www.irs.gov/forms-pubs/about-form-3520.

Mistake 2 — Not Filing Form 3520-A Annually

Form 3520-A must be filed annually by the trustee of a foreign grantor trust with at least one US grantor, with a due date of 15 March of the year following the trust's tax year. Furthermore, the 5% penalty on trust assets for failure to file is one of the most severe information return penalties in the US tax code, and it applies annually for each year the form is not filed. The correct approach requires establishing a Form 3520-A annual filing from the first year of the trust's existence, coordinated between the US grantor and the offshore trustee.

Mistake 3 — Not Claiming the UK IHT as a Foreign Tax Credit

The UK periodic charge paid by a relevant property trust is a creditable foreign tax for US federal income tax purposes where the trust is a grantor trust — since the UK IHT is ultimately borne by the US-citizen grantor who owns the trust assets for US tax purposes. Furthermore, many non-specialist preparers do not claim the UK IHT periodic charge as a foreign tax credit on the US return for the anniversary year, missing a potentially significant credit that reduces the net US tax on the grantor's combined income for that year. The correct approach requires calculating the foreign tax credit for the UK periodic charge on Form 1116, allocating the credit to the passive income basket, and carrying forward any excess credit not used in the anniversary year.

Mistake 4 — Not Applying the Post-2025 IHT Rule Changes

Offshore trusts settled by individuals who were not UK-domiciled at the time of settlement previously benefited from excluded property status for the trust's non-UK assets — exempting them from the UK periodic charge. Furthermore, the April 2025 abolition of the non-domicile regime replaced the domicile test with a residence-based test, meaning trusts settled by individuals who are now long-term UK residents may have lost their excluded property status. The correct approach requires a specific legal and tax review of the trust's excluded property status under the new residence-based rules before the tenth anniversary, to confirm whether UK IHT periodic charges now apply to assets that were previously exempt. HMRC guidance is at https://www.gov.uk/government/publications/changes-to-the-taxation-of-non-uk-domiciled-individuals.

Mistake 5 — Not Including Trust Accounts in the FBAR

Where a U.S. citizen settlor or beneficiary has a financial interest in or signature authority over the offshore trust's financial accounts — as is the case for most grantor trusts where the settlor is treated as the owner — those accounts must be included in the annual FBAR. Furthermore, the offshore trustee's bank and brokerage accounts are foreign financial accounts of the US-person grantor for FBAR purposes, and the balance of each account at its highest point during the year contributes to the aggregate FBAR balance calculation. The correct approach requires obtaining the trust's annual account statements from the offshore trustees and including the relevant accounts in the US grantor's annual FBAR from the first year of the trust's existence.

Mistake 6 — Not Identifying PFIC Holdings Within the Trust

Offshore trust investment portfolios typically hold non-US-domiciled funds — Irish OEICs, Guernsey equity funds, Luxembourg SICAVs — that are PFICs for the US grantor. Furthermore, the grantor trust rules pass through the PFIC character of the trust's investments to the US-citizen settlor, who must make QEF or mark-to-market elections for each PFIC holding — elections that must be made on Form 8621 from the first year of ownership. The correct approach requires a full PFIC inventory of the trust's investment portfolio as of the year of establishment, with Form 8621 elections made for each PFIC in the first year and maintained annually.

Get in Touch

At US-UK Tax, our team of Chartered Tax Advisers (CTA), Enrolled Agents (EA), and Certified Public Accountants (CPA) — members of the Chartered Institute of Taxation (CIOT) and the American Institute of CPAs (AICPA) — are the US and UK tax advisors who manage the complete dual-jurisdiction compliance programme for offshore trusts with UK-resident US-citizen connections. Furthermore, we coordinate the UK IHT100 ten-year charge calculation and filing, the US Form 3520-A annual trust return, the Form 3520 beneficiary/settlor return, the PFIC election framework for the trust's investment portfolio, the FBAR and Form 8938 reporting for the trust accounts, and the foreign tax credit for UK IHT paid — as a single coordinated engagement that addresses all obligations from both sides simultaneously. We work directly with the offshore trustees to obtain the financial data required for the US returns and to ensure the IHT100 and the Form 3520-A are consistent in their treatment of asset values and distributions.

Contact our team today to begin a confidential review of your offshore trust's ten-year charge and US compliance position. Email hello@us-uktax.com, call 0333-8807974, or visit https://www.us-uktax.com/contact/ to book a consultation.

Conclusion

The tenth anniversary charge on an offshore trust is one of the most significant recurring compliance events for a UK-resident US-citizen settlor or beneficiary — simultaneously triggering a UK IHT100 return, a periodic charge of up to 6% of the relevant property value, and renewed attention to the accumulated US reporting gaps that have built up during the decade since the trust was established. Furthermore, the April 2025 abolition of the non-domicile regime has expanded the range of offshore trusts now subject to the UK periodic charge, bringing previously exempt excluded property into the relevant property regime for the first time for long-term UK residents. Consequently, engaging US and UK tax advisors who can simultaneously calculate the UK periodic charge, prepare the IHT100, correct the missed Form 3520-A annual filings, make retroactive PFIC elections for the trust's investment holdings, and claim the UK IHT as a foreign tax credit on the US return is the only way to manage the tenth anniversary comprehensively in both systems.

The three most important actions for any UK-resident US citizen with an offshore trust approaching or past its tenth anniversary are: first, confirm the trust's excluded property status under the new April 2025 residence-based rules — since the periodic charge may now apply to assets that were previously exempt; second, review the Form 3520-A annual filing history and initiate a correction programme for any missed years before the anniversary filing draws attention to the gap; and third, identify all PFIC holdings within the trust portfolio and make retroactive elections to avoid the punitive excess distribution regime applying to accumulated trust growth. Contact US-UK Tax at hello@us-uktax.com or call 0333-8807974 to begin a confidential offshore trust review today.

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FAQs

Q: What is the UK tenth anniversary charge on offshore trusts?

It is a UK IHT periodic charge of up to 6% of the trust's relevant property value, arising on every tenth anniversary of the trust's creation. The chargeable value is the relevant property above the available nil-rate band, and the charge must be reported on an IHT100 and paid within six months of the anniversary date.

Q: Is an offshore trust settled by a US citizen a US grantor trust?

Yes, under IRC Section 679, if settled by a US citizen after 5 March 1984 with US-person beneficiaries. The US settlor is treated as the owner of the entire trust for income tax purposes and must include all trust income on the US return each year, regardless of any distributions.

Q: What is Form 3520-A, and who must file it?

Form 3520-A is the annual information return filed by the trustee of a foreign grantor trust with at least one US grantor. It is due on 15 March each year for the prior year's trust activity. The penalty for failure to file is the greater of $10,000 or 5% of the gross value of the US-person-owned trust assets.

Q: Does the April 2025 IHT reform affect offshore trust periodic charges?

Yes significantly. The abolition of non-dom status replaced the domicile test with a residence test for excluded property. Offshore trusts settled by individuals who are now UK long-term residents may have lost excluded property status, bringing previously exempt assets into the ten-year periodic charge for the first time.

Q: Can UK IHT paid on the ten-year charge be credited against US tax?

Yes. The UK periodic charge is creditable as a foreign tax for US federal income tax purposes when the trust is a Section 679 grantor trust. The credit is claimed on Form 1116 in the passive income basket and reduces the US income tax on the grantor's combined income for the anniversary year.

Q: Must offshore trust accounts be reported on the FBAR?

Yes, where the US-citizen settlor has a financial interest in or signature authority over the trust's accounts. For grantor trusts, the settlor is treated as owning the accounts. Each account with a balance exceeding $10,000 at any point must be included in the annual FBAR.