Trustees and UK tax disputes: navigating increased HMRC scrutiny

The third article in our tax disputes series looks at the increasing scrutiny faced by trustees, the key areas of risk for offshore structures, and the practical steps trustees can take to manage exposure. Read the previous articles in the series here: UK tax disputes: managing tax risk and Tax and reputation management: why sound tax affairs are a strategic imperative.

HMRC’s drive to close the 'tax gap' has put offshore structures and high‑net‑worth individuals under unprecedented scrutiny. The abolition of the protected settlement regime and the introduction of the new 'non‑dom' rules, combined with enhanced reporting, mean HMRC now receives information on assets and structures that were previously out of sight. This increased visibility gives HMRC greater opportunity to identify discrepancies and challenge historic planning.

What are the key areas of risk for trustees?

1. Residence

Residence status – for individuals, trusts and companies – remains a major focus of HMRC enquiries.

Corporate residence is determined by central management and control: where strategic decisions are actually made. If those decisions take place in the UK, the company will be treated as a UK resident for tax purposes, even if it is incorporated offshore. UK‑based directors or significant shareholders are a clear red flag for HMRC, as are frequent visits to the UK and ownership of or access to UK real estate.

Trustee residence can also create exposure. If an individual trustee moves to the UK, this may affect the residence status of the trust. Similarly, if the management and control of a corporate trustee shifts to the UK, HMRC may argue that the trust itself has become a UK resident. Both decision‑making and the residence status of individual trustees therefore need to be monitored.

Settlor residence remains critical. With the protected settlement regime abolished, the income and gains of a non‑resident trust may be attributed to a UK‑resident settlor unless a motive defence applies. HMRC is likely to challenge settlor residence where there is evidence of UK ties.

2. Long‑term residence of the settlor

Under the previous rules, a trust’s excluded property status (ie exemption from inheritance tax on non-UK assets) was fixed at settlement. Under the new regime, that status may fluctuate if the settlor becomes a 'long‑term resident' in the UK.

Where that test is met, the trust may cease to be excluded property and inheritance tax charges may arise under the relevant property regime; these are trustee liabilities. In addition, a trust with a long‑term resident settlor will generally fall within the Gifts with Reservation of Benefit rules (unless the trust was created before Budget 2024), with any resulting charges likewise borne by the trustees. 

The regime also increases reporting requirements. Trustees will likely be required to provide extensive information to settlors, beneficiaries and even directly to HMRC. This will increase both the administrative burden and the likelihood of enquiries. Accurate records and ongoing monitoring of settlor status and relevant dates are therefore essential.

3. Tainting

Although the protected settlement regime no longer applies, many trusts were inadvertently tainted between 6 April 2017 and 5 April 2025. Under the old rules, tainting caused a trust to lose its protected status, exposing income and gains to taxation on the UK‑resident settlor.

Tainting broadly arose where property was added to a trust after 6 April 2017 when the settlor was deemed domiciled, or where certain transactions – such as loans or guarantees – were entered into.

Increased reporting means HMRC now has far greater visibility. Disclosures may reveal the existence of previously protected trusts and provide HMRC with the information needed to identify historic tainting or a risk of tainting. As a result, issues that may previously have gone unnoticed are more likely to come to light during enquiries.

4. Remittances

Although the remittance basis has been abolished, income and gains arising to former non‑doms before 6 April 2025 may still be taxable if they are later remitted to the UK. A remittance occurs broadly where foreign income or gains, or assets representing them, are brought to, used in or enjoyed in the UK.

This remains relevant to trustees because remittances can arise indirectly – for example through payments for UK expenses, benefits provided to UK‑resident beneficiaries, loans or guarantees with UK connections, or transactions involving mixed funds. Trustees may therefore trigger UK tax liabilities without any obvious transfer of cash to the UK.

This area is of particular interest to HMRC. The rules are complex, familiarity is likely to diminish over time, and inadvertent errors are common. Increased disclosure gives HMRC more data against which to test consistency, making mistakes more likely to be identified. The Finance Act 2025 widened the definition of a remittance, reinforcing HMRC’s focus and the risk of enquiry.

5. Motive defences

Anti‑avoidance rules can tax UK‑resident settlors and beneficiaries on income and gains arising within trusts (and owners of companies on profits within corporate structures). These rules include motive defences for arrangements established and implemented for reasons other than UK tax.

In practice, the tests are uncertain, fact‑sensitive and complex. A defence can also be lost as a result of later actions, meaning trustees should be cautious before taking steps that could undermine its availability.

Under the new regime, more taxpayers are likely to seek to rely on motive defences. HMRC may regard widespread reliance as reducing its expected tax yield and is therefore likely to scrutinise such claims more aggressively. The burden of proof lies with the taxpayer, and contemporaneous evidence of non‑tax motives will be critical. Reform is expected, but not before 2027.

What should trustees be doing to manage these risks?

1. Take advice and review regularly

Trustees should ensure they understand how the new regime affects their structures and potential liabilities. Regular reviews can help ensure compliance and identify issues early, including exposure arising from UK‑source income and relevant property.

2. Monitor settlor residence

Trustees must ensure they have correctly identified the settlor for UK tax purposes, bearing in mind that definitions differ between taxes, the named settlor may not be the settlor for tax purposes and a trust may have more than one settlor. Systems should be in place to monitor residence and long‑term residence status and relevant dates.

3. Keep appropriate records

Trustees should keep clear and contemporaneous minutes and resolutions evidencing where and how decisions are made. Where structures include non‑UK companies, directors should likewise maintain proper board records demonstrating that strategic decision‑making occurs outside the UK. Adequate accounting records should also be maintained to support settlors’ and beneficiaries’ UK tax reporting, including details of income and pools of gains.

4. Manage requests from beneficiaries

Requests for information from beneficiaries and settlors should be handled with care, particularly where they arise in the context of an HMRC enquiry. Trustees must consider their disclosure obligations under the trust instrument and local law, as well as the potential impact of disclosures on themselves and other beneficiaries. Trustees should strike an appropriate balance between cooperation and over‑disclosure, ensuring that information provided is accurate, proportionate and consistent.

5. Think about legal privilege

Trustees should be aware that legal advice privilege does not generally extend to communications with accountants or other non‑lawyer advisers. Where sensitive issues are being explored – particularly potential irregularities – early engagement with a solicitor can help ensure that advice is protected, while still allowing for a collaborative approach with other advisers.

About this series

This briefing forms part of a series on UK tax disputes, drawing on our experience advising individuals, trustees and family offices on HMRC enquiries, investigations and related litigation. The series explores how HMRC’s approach is evolving, where the key risks now lie, and the practical steps that can be taken to manage exposure and protect reputation.
The series includes:

• UK tax disputes: managing tax risk – examining the drivers behind increased HMRC scrutiny and common triggers for enquiries;
• Tax and reputation management: why sound tax affairs are a strategic imperative – considering the growing intersection between tax compliance and reputational risk; and
• Trustees and UK tax disputes: navigating increased HMRC scrutiny – focusing on the particular challenges facing trustees and offshore structures.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, January 2026