US UK Cross-Border Tax Specialist EPTs After FA 2025 |

US UK Cross-Border Tax Specialist EPTs After FA 2025 |

US UK Cross-Border Tax Specialist: EPTs After FA 2025

US UK Cross-Border Tax Specialist on EPTs After FA 2025

For decades, the excluded property trust was the central tool of UK international tax planning for wealthy individuals who were resident in the UK but not yet domiciled here — allowing them to settle non-UK assets into an offshore trust that sat entirely outside the UK inheritance tax system for as long as the trust's assets remained excluded property. The Finance Act 2025 fundamentally dismantled that framework, replacing the domicile-based excluded property test with a residence-based test under which long-term UK residents can no longer shelter non-UK assets from IHT inside an excluded property trust structure. Furthermore, every US UK cross-border tax specialist who advises HNW families at the intersection of US and UK tax finds that the FA 2025 changes have created a particular problem for US-citizen families in the UK who used excluded property trusts during a period when the settlor was a non-domiciled US citizen — because the US side of those trust structures creates its own set of compliance obligations under the grantor trust rules and the foreign trust reporting regime that have nothing to do with the UK IHT position, and that continue to apply regardless of how the UK IHT treatment changes.

This article is written for US citizens who are UK residents and who are beneficiaries or settlors of excluded property trusts established before FA 2025, as well as for families considering their options after the excluded property framework has changed. By the end of this guide, you will understand what FA 2025 changed, what remains unchanged, and how an experienced US-UK cross-border tax specialist navigates the new dual-compliance landscape for existing EPT structures.

What Is a US UK Cross-Border Tax Specialist?

A US UK cross-border tax specialist is a tax professional with simultaneous qualifications and active practice in both US federal tax and UK tax, who can advise clients on how a single trust structure — such as an excluded property trust — is treated simultaneously by HMRC under the IHT regime and by the IRS under the foreign trust reporting rules, the grantor trust provisions, and the PFIC regime for the trust's investment holdings. Furthermore, in the EPT context, the specific expertise required combines deep knowledge of the Finance Act 2025 IHT changes — the new long-term residence test, the transitional provisions for existing trusts, and the treatment of additions to trust after April 2025 — with the US rules for IRC Section 679 grantor trusts, Form 3520-A annual trust returns, Form 3520 beneficiary and settlor returns, FBAR for trust accounts, and Form 8938 for trust assets as specified foreign financial assets. Specifically, the most critical function of a US UK cross-border tax specialist for an existing EPT is to assess simultaneously whether the trust's assets have lost their excluded property status under the new residence-based test, and whether the trust has been correctly reported for US purposes — since both analyses are urgent in 2026 and both may require corrective action.

The HMRC guidance on the Finance Act 2025 IHT changes and the new residence-based excluded property rules is at https://www.gov.uk/government/publications/changes-to-the-taxation-of-non-uk-domiciled-individuals. The IRS guidance on foreign trust reporting is at https://www.irs.gov/forms-pubs/about-form-3520.

What FA 2025 Changed for Excluded Property Trusts

The Old Domicile-Based Excluded Property Test

Under the pre-FA 2025 IHT regime, an excluded property trust was a trust settled by a non-UK-domiciled individual — someone who had not acquired a UK domicile of choice and had not been UK resident for fifteen of the prior twenty years under the deemed domicile rules — holding assets situated outside the United Kingdom. Furthermore, the critical feature of the old regime was that the IHT excluded property status of the trust's non-UK assets was determined at the date of the trust's creation and locked in for the trust's entire existence — meaning that once validly settled, the trust's non-UK assets remained excluded property and outside the UK IHT periodic charge even after the settlor subsequently acquired UK deemed domicile or a UK domicile of choice. Consequently, a US-citizen settlor who established a Jersey trust in 2010 holding a US investment portfolio — before becoming UK deemed domiciled in 2015 — could continue to benefit from the excluded property protection for the trust's US assets indefinitely under the old rules, since the excluded property status was determined at the date of settlement when the settlor was not yet UK deemed domiciled.

The New Residence-Based Excluded Property Test Under FA 2025

The Finance Act 2025 replaced the domicile-based excluded property test with a long-term residence test, under which a trust's non-UK assets lose their excluded property status when the settlor is a long-term UK resident — defined as an individual who has been UK resident for ten or more of the preceding twenty tax years. Furthermore, unlike the old domicile-based test, the new residence-based test is not locked in at the date of the trust's creation — it is assessed on each tenth anniversary and on each distribution from the trust, meaning that a trust that was created before FA 2025 with excluded property status can lose that status on a future anniversary or exit event once the settlor becomes a long-term UK resident. Consequently, a US-citizen settlor who established a Jersey trust in 2015 — when they had been UK resident for only five years — and who will have been UK resident for more than ten years by April 2025 will find that the trust's non-UK assets lose their excluded property status on the next tenth anniversary or exit charge occasion after the settlor crosses the long-term residence threshold. The HMRC guidance on the new residence-based test and transitional provisions is at https://www.gov.uk/government/publications/changes-to-the-taxation-of-non-uk-domiciled-individuals.

The Transitional Provisions for Existing Trusts

The Finance Act 2025 includes transitional provisions that protect certain distributions and additions made before specific dates from the new excluded property test and that provide some grandfathering protection for trusts established before the legislation. Furthermore, the transitional rules are complex and must be applied carefully to each trust structure, since the available protection depends on the date of the trust's creation, the date of any additions to the trust after the legislation was announced, and the settlor's residence on each relevant date. Additionally, additions made to an excluded property trust after the announcement of the reforms — particularly where the settlor was already close to becoming a long-term UK resident — may have accelerated the loss of excluded property status or created additional IHT charges that the transitional provisions do not protect. Consequently, a US-UK cross-border tax specialist review of each existing EPT structure is essential in 2026 to map the specific transitional provisions available to that trust and to confirm the IHT treatment of both historical additions and planned future distributions. The ICAEW technical guidance on the FA 2025 IHT trust changes is at https://www.icaew.com.

US Compliance Obligations for EPT Settlors and Beneficiaries

Section 679 Grantor Trust Treatment for U.S. Citizen Settlors

For a US citizen who settled an offshore excluded property trust after 5 March 1984 with US person beneficiaries — including their own children who hold US citizenship — the trust is a grantor trust for US income tax purposes under IRC Section 679, regardless of the UK IHT treatment. Furthermore, the grantor trust classification means the US-citizen settlor must include all of the trust's income and capital gains in their US gross income each year, converting the trust's investment returns to US dollars and reporting them on the Form 1040 for the year the income arises — not the year of any distribution. Additionally, the Section 679 grantor trust treatment is entirely unaffected by the FA 2025 changes to the UK IHT position — the US grantor trust rules apply to the same trust structure regardless of whether the trust's assets are excluded property or relevant property for UK IHT purposes. Consequently, a US-citizen settlor whose EPT loses excluded property status under FA 2025 has both an increased UK IHT exposure and a pre-existing US income tax obligation on the trust's income — obligations that must now be managed in parallel by a US-UK cross-border tax specialist who understands both the new UK IHT position and the continuing US compliance requirement.

Form 3520-A and Form 3520: The Annual Filing Obligations

The offshore trustee of a foreign grantor trust with a U.S. citizen grantor must file Form 3520-A annually by 15 March of the year following the trust's tax year, reporting the trust's income, assets, and distributions. Furthermore, the U.S. citizen settlor must file Form 3520 annually reporting their ownership interest in the trust and any distributions received, and must ensure that the trustee files Form 3520-A — since the IRS imposes a 5% of trust assets penalty on the settlor where Form 3520-A is not filed and the trustee cannot be compelled to comply. Additionally, for UK-resident US citizens whose EPTs have been managed by offshore trust companies without any US reporting, the Form 3520-A and Form 3520 filing gap is typically measured in years — corresponding to the entire period of the trust's existence — and the correction requires either the IRS streamlined procedures or a voluntary disclosure under the OVDP framework, depending on the circumstances. The IRS Form 3520-A instructions are at https://www.irs.gov/forms-pubs/about-form-3520-a.

PFIC Holdings Within the EPT Portfolio

The investment portfolios of offshore excluded property trusts typically hold non-US-domiciled funds — Irish OEICs, Luxembourg SICAVs, Guernsey equity funds — that are passive foreign investment companies for US tax purposes. Furthermore, the grantor trust rules pass through the PFIC character of these fund holdings to the US-citizen settlor, who must make QEF or mark-to-market elections for each PFIC from the first year of the trust's existence. Additionally, where no PFIC elections have been made for prior years — which is the case for virtually all EPTs whose offshore trustees have managed the trust without US tax input — 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. Consequently, an EPT that has grown from £1.5 million to £2.8 million over its ten-year existence through PFIC investment growth has accumulated approximately £1.3 million of unreported US income — converted to US dollars at the applicable exchange rates — that must be addressed through the retroactive PFIC election programme.

Reviewing an Existing EPT Under FA 2025: Steps

Step 1 — Confirm the settlor's long-term residence status under the new test.

Establish the settlor's year-by-year UK residence history from the date of the trust's creation to the present, and confirm when the settlor first met the long-term residence threshold of ten out of the preceding twenty tax years. Furthermore, where the settlor has already crossed the long-term residence threshold before April 2025, confirm whether the transitional provisions protect the existing trust's excluded property status for any period, and identify the first date on which the trust's assets will be tested under the new residence-based rules. Additionally, review any additions made to the trust after the announcement of the FA 2025 reforms to confirm whether those additions retain their excluded property status under the transitional provisions or have already been brought into the relevant property regime. The HMRC guidance on the new long-term residence test is at https://www.gov.uk/government/publications/changes-to-the-taxation-of-non-uk-domiciled-individuals.

Step 2 — Model the UK IHT periodic charge exposure under the new rules.

Calculate the trust's relevant property value — the trust assets that have lost excluded property status under the new residence-based test — and model the UK IHT periodic charge that would arise on the next ten-year anniversary under the relevant property trust regime. Furthermore, consider whether the trust structure should be reviewed — for example, whether a distribution to the beneficiaries before the next anniversary would be preferable to bearing the periodic charge — and model the UK exit charge that would arise on such a distribution, since a distribution between anniversaries also triggers an IHT charge proportional to the periodic charge rate. Additionally, confirm whether the trust holds any UK-situs assets — UK real estate, UK shares, UK bank accounts — that would have been relevant property even before FA 2025, as those assets must be included in the IHT calculation regardless of the settlor's domicile or residence.

Step 3 — Assess the US grantor trust reporting obligations.

Confirm whether the trust is a Section 679 grantor trust — applicable where the US-citizen settlor established the trust after 5 March 1984 with US-person beneficiaries — and review the Form 3520-A and Form 3520 filing history to identify any years in which the required returns were not filed. Furthermore, obtain the trust's annual accounts, income statements, and distribution records from the offshore trustees for each year of the trust's existence, since these documents are required to prepare the retroactive Form 3520-A filings for the missed years. Additionally, confirm whether any distributions from the trust have been made to US-citizen beneficiaries in any prior year, since those distributions must be reported on Form 3520 by the recipient in the year of receipt — including the characterization of the distribution as a trust distribution versus a grantor trust payment to the settlor as deemed owner.

Step 4 — Identify and correct the PFIC election gaps.

Review the trust's investment portfolio and identify all non-US-domiciled funds held at any point during the trust's existence, and confirm which are passive foreign investment companies. Furthermore, for each PFIC, confirm whether a QEF or mark-to-market election has been made on Form 8621 for each year of ownership — and where no election has been made, prepare the retroactive Form 8621 mark-to-market election filings for each covered year, treating the annual increase in PFIC value as ordinary income to the grantor settlor. Additionally, obtain the annual net asset value or unit price data for each PFIC fund held in the trust for each year of ownership, since the mark-to-market calculation requires the year-start and year-end values for each PFIC in each year. The IRS PFIC guidance is at https://www.irs.gov/forms-pubs/about-form-8621.

Step 5 — Coordinate the UK IHT and US reporting strategies.

Prepare a coordinated advice memorandum that addresses both the UK IHT position under the new FA 2025 rules and the US reporting obligations simultaneously, confirming how decisions on the UK side — distributions from the trust, additions to the trust, restructuring of the trust assets — interact with the US reporting obligations for the same transactions. Furthermore, where a distribution from the EPT is being considered as a response to the loss of excluded property status, model the US tax consequences of the distribution alongside the UK exit charge — since a distribution from a Section 679 grantor trust is not a taxable event for the grantor for US income tax purposes (having already been taxed on the trust income annually), but may affect the grantor's Form 3520 reporting obligations for the year of distribution. Additionally, establish a going-forward annual compliance program that produces the UK IHT reporting, Form 3520-A, and Form 1040 grantor trust income simultaneously each year — ensuring that the two jurisdictions' obligations are managed in a coordinated and consistent manner.

Case Study: US Citizen in London, EPT Under FA 2025

Our team was engaged by a US citizen who had lived in London for thirteen years and had settled a Jersey-excluded property trust in 2014 — when he had been a UK resident for only two years and was clearly not UK domiciled. The trust held a US investment portfolio valued at approximately $2.8 million and a UK commercial property valued at £400,000. The offshore trustees had filed UK IHT returns where required but had not filed any US returns — no Form 3520-A for any year, no FBAR for the trust accounts, and no PFIC elections for the trust's US equity fund holdings. The settlor had included none of the trust's income on his US returns.

After reviewing the settlor's residence history, we confirmed that he had become a long-term UK resident in April 2024 — completing his tenth year of UK residence — and that under the FA 2025 provisions, the trust's non-UK assets would lose their excluded property status on the first relevant occasion after that date. Furthermore, the UK commercial property — already UK situs — had always been relevant property, and the trust's tenth anniversary in 2024 triggered a periodic charge of approximately £9,200 (6% of £400,000, above the available nil-rate band). Additionally, the trust's US investment portfolio — previously excluded property — would become relevant property at the next ten-year anniversary in 2034, when the trust's total relevant property would be approximately £2.5 million (the US portfolio at current sterling equivalent values plus the UK property) — producing a projected periodic charge of approximately £131,000 in 2034 under the relevant property trust formula.

For the US position, we confirmed the trust was a Section 679 grantor trust and that the US equity fund holdings — invested in three US-domiciled mutual funds and one Guernsey-domiciled global equity fund — included one PFIC. Furthermore, we prepared 10 years of retroactive Form 3520-A filings and the settlor's corresponding Form 3520 for each year. We made the retroactive mark-to-market election for the Guernsey fund, presulting inannual mark-to-market income inclusions of approximately $28,000 per year based on the fund's average annual growth. Additionally, we advised the trustees that making a significant distribution from the US portfolio to the settlor before the 2034 anniversary — reducing the relevant property value — could substantially reduce the projected periodic charge, and modeled the UK exit charge and US tax consequences of such a distribution to confirm the most tax-efficient restructuring approach. The FBAR for the trust's US brokerage account and UK property management account was filed for the six-year streamlined covered period, with the 5% streamlined penalty on the highest aggregate balance of approximately $3.2 million producing a penalty of $160,000.

Common Mistakes with EPTs After FA 2025

Mistake 1 — Assuming the Old Trust Retains Excluded Property Status

The most consequential mistake after FA 2025 is continuing to assume that a trust established before April 2025 with excluded property status retains that status indefinitely under the new rules. Furthermore, the FA 2025 changes apply to the next periodic charge occasion and exit charge event after the settlor becomes a long-term UK resident — meaning that a trust established in 2012 by a US-citizen settlor now approaching their eleventh year of UK residence is likely to face its first relevant property periodic charge on the 2022 anniversary under the new test. The correct approach requires a specific residence-date analysis for each existing EPT settlor to confirm when the long-term residence threshold was or will be crossed. HMRC guidance is at https://www.gov.uk/government/publications/changes-to-the-taxation-of-non-uk-domiciled-individuals.

Mistake 2 — Making Additions to the Trust After the Reform Announcement

Additions made to an excluded property trust after the announcement of the FA 2025 reforms — October 2024 — may not benefit from the same transitional protection as the trust's original settled property. Furthermore, where a settlor made additional contributions to the offshore trust after the announcement date, those additions may be treated as relevant property from the date of the addition — creating an immediate relevant property trust periodic charge base even before the next anniversary. The correct approach requires reviewing all additions made since October 2024 to confirm their IHT treatment under the transitional provisions and, where they are relevant property, calculating the exit charge implications of any planned distributions of those additional assets.

Mistake 3 — Not Preparing a US Return for the Grantor Trust Income

A US-citizen settlor of a Section 679 grantor trust must include the trust's entire income and capital gains on their personal US return each year — regardless of whether any distribution was made. Furthermore, many EPT settlors who have managed their UK tax position correctly through their offshore trustees have never been advised of the parallel US income tax obligation, and have accumulated years of unreported trust income that must be addressed through the streamlined procedures. The correct approach requires a specific US grantor trust opinion regarding the trust's IRC Section 679 classification in the first year of the trust's existence, with annual US income reporting thereafter. IRS grantor trust guidance is at https://www.irs.gov/forms-pubs/about-form-3520.

Mistake 4 — Not Modeling the 2034 Periodic Charge Now

Trusts that have not yet reached their next ten-year anniversary under the new relevant property rules have a window of opportunity — between now and the anniversary date — to reduce the relevant property value through planned distributions, potentially avoiding or significantly reducing the future periodic charge. Furthermore, the modeling of the 2034 (or whichever anniversary applies) periodic charge requires current valuations, a UK IHT calculation, and a comparison with the exit charge on an immediate distribution — a multi-year planning analysis that requires a US UK cross-border tax specialist who understands both the UK IHT mechanics and the US tax consequences of trust distributions. The correct approach requires commissioning this analysis well in advance of the anniversary to maximise the planning options available before the charge falls due.

Mistake 5 — Not Reviewing the Trust Deed for Trustee Powers

Restructuring options for an existing EPT — including distributions to beneficiaries, adding or removing assets, changing the investment mandate — all depend on the trustee powers available under the trust deed and the governing law of the trust. Furthermore, Jersey and Guernsey trust deeds frequently include broad discretionary powers, whereas Cayman and BVI structures may have more restrictive terms that limit restructuring options before the next anniversary. The correct approach requires the offshore trustee to review the trust deed's powers in consultation with a US UK cross-border tax specialist before any restructuring action is taken, to confirm that the proposed transaction is within the trustee's powers and that the UK IHT and US tax consequences are modeled correctly before the action is executed.

Mistake 6 — Failing to Report the Trust's UK Property on IHT Returns

UK situs assets held within an excluded property trust — UK real estate, UK shares, UK bank accounts — have always been relevant property subject to the UK periodic charge, regardless of the settlor's domicile or the trust's excluded property status for non-UK assets. Furthermore, many EPT settlors are unaware that the trust's UK commercial or residential property has been subject to the UK periodic charge since the trust's inception, and that IHT100 returns should have been filed for every previous tenth anniversary. The correct approach requires reviewing the IHT100 filing history for the trust's UK property assets and filing retrospective returns for any missed anniversary charges, as HMRC's penalty regime for missed IHT100 returns applies regardless of the trust's non-UK assets' excluded property treatment.

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) — is the US UK cross-border tax specialist practice that provides the coordinated UK IHT and US compliance review that existing excluded property trust settlors and beneficiaries urgently need in 2026. Furthermore, we assess the settlor's long-term residence position under FA 2025, model the IHT periodic charge exposure under the new relevant property test, prepare the Form 3520-A annual trust returns, make retroactive PFIC elections for the trust's investment holdings, file the FBAR for the trust's accounts, and coordinate the UK exit charge and US tax modelling for any planned distributions — as a single engagement that addresses both jurisdictions' requirements simultaneously. We work directly with the offshore trustees to obtain the financial data required for both the UK IHT and US filing programs.

Contact our team today to begin a confidential review of your excluded property trust's post-FA 2025 position. Email hello@us-uktax.com, call 0333-8807974, or visit https://www.us-uktax.com/contact/ to book a consultation.

Conclusion

The Finance Act 2025 fundamentally changed the excluded property trust landscape for UK-resident US citizens, replacing the domicile-based excluded property test with a residence-based test that brings long-term UK residents' offshore trust assets into the UK IHT-relevant property regime — on a forward-looking basis for each future periodic charge occasion rather than retrospectively. Furthermore, the US side of an existing EPT — the Section 679 grantor trust income reporting, the Form 3520-A annual filing obligation, the PFIC elections for the trust's fund holdings, and the FBAR for the trust's accounts — continues to apply regardless of how the UK IHT position changes, creating a parallel compliance programme that every US UK cross-border tax specialist advising on EPT restructuring must address alongside the UK analysis. Moreover, the window between the FA 2025 changes and each trust's next tenth anniversary is the critical planning period for modeling and implementing distribution strategies that could significantly reduce the projected periodic charge under the new relevant property regime.

The three most important actions for any UK-resident US citizen with an existing excluded property trust are: first, confirm when the settlor crossed or will cross the long-term residence threshold — since that date determines when the trust's non-UK assets become relevant property and when the first periodic charge under the new rules will fall due; second, review the Form 3520-A and PFIC election filing history and initiate the correction programme for any missed years; and third, commission the UK IHT periodic charge modelling for the next anniversary alongside the US tax consequences of a pre-anniversary distribution, to establish the most tax-efficient restructuring strategy before the charge becomes unavoidable. Contact US-UK Tax at hello@us-uktax.com or call 0333-8807974 to begin a confidential EPT review today.

Contact Us

US-UK Tax | hello@us-uktax.com | 0333-8807974

https://www.us-uktax.com

FAQs

Q: What did FA 2025 change for excluded property trusts?

FA 2025 replaced the domicile-based excluded property test with a long-term residence test. Trust assets lose excluded property status when the settlor has been UK resident for ten or more of the preceding twenty tax years — assessed at each future periodic charge occasion, not locked in at the trust's creation date.

Q: Is a U.S. citizen's excluded property trust a US grantor trust?

Yes, under IRC Section 679, if settled after 5 March 1984 with US-person beneficiaries. The U.S. citizen settlor must include all trust income on their US return each year. This applies regardless of the trust's UK IHT excluded property status or the FA 2025 changes.

Q: What is the ten-year periodic charge under the new EPT rules?

Once assets lose excluded property status and become relevant property, the IHT periodic charge of up to 6% applies on each tenth anniversary. The chargeable value is the relevant property above the available nil-rate band. The charge must be reported on the IHT100 within six months of the anniversary.

Q: Can distributions from an EPT reduce the future periodic charge?

Yes. Distributing assets from the trust before the next anniversary reduces the relevant property value and therefore the future periodic charge. However, a UK exit charge applies to mid-anniversary distributions at a proportional rate. Both the exit charge and US tax consequences of the distribution must be modeled before any action is taken.

Q: What Form 3520-A and Form 3520 obligations apply to EPT settlors?

Form 3520-A must be filed annually by the offshore trustee for any year the trust has a US grantor. Form 3520 must be filed by the settlor annually. The penalty for non-filing Form 3520-A is 5% of trust assets per year. These obligations continue regardless of FA 2025 changes to the UK IHT position.

Q: Are PFIC elections required for an EPT's investment portfolio?

Yes. Where the trust holds non-US-domiciled funds — Irish OEICs, Guernsey equity funds, Luxembourg SICAVs — those funds are PFICs for the US grantor-settlor. QEF or mark-to-market elections must be made on Form 8621 from the first year of each PFIC's ownership, with retroactive correction through the streamlined procedures for missed years.