Distributions from non-UK resident trusts made before the Budget – were they a mistake?

The Budget introduced two unexpected changes to the taxation of offshore trusts which may leave some beneficiaries and trustees facing higher tax charges than anticipated.  Can these distributions be reversed?

The Budget delivered by Rachel Reeves on 26 November 2025 introduced two unexpected changes to the tax treatment of non-UK resident trusts. These changes, which follow swiftly on from the wholesale changes introduced with effect from 6 April 2025, may impact those who have received trust distributions since 6 April 2025 and cause settlors, trustees and beneficiaries to wonder whether it would be possible to reverse such distributions.  This article explains the changes and considers the scope for reversing the distributions after the event.

The issues discussed in this article are, by their very nature, technical.  It assumes the reader’s familiarity with the pre-6 April 2025 rules for the taxation of offshore trust structures and the changes which were introduced from that date.  If further information about these rules is required, we suggest reading our previous article which explain these rules in detail: The UK’s proposals for non-doms and their structures.

The changes introduced in the November 2025 Budget

5% inheritance tax cap

In the Budget, a sweetener was introduced for trusts which were previously excluded property (and so were outside the scope of inheritance tax) and now find themselves within the relevant property regime (and so are subject to inheritance tax at up to 6% every 10 years and when assets exit the trust).  This new rule means that, for trusts created prior to 30 October 2024 and which were excluded property trusts, 10-year and exit charges due once the trust falls into the relevant property regime will be capped at £5m every 10 years.  

In practice, this cap will only bite on trusts worth over £83.3m (£83.3m @6% = £5m).  At this level it is very common to see multiple trusts established by one settlor.  The cap is per trust, not per settlor, and so will be less likely to assist in multi-trust scenarios.  However, for a single trust with assets over £83.3m, the relief could be extremely valuable. 

The TRF

To soften the blow of the April 2025 changes, certain transitional reliefs were introduced at that time including the “Temporary Repatriation Facility” (“TRF”). This enables individuals who have at any time in the past been subject to the remittance basis to remit pre-6 April 2025 foreign income and gains (“FIG”) to the UK subject to a flat rate of tax of 12% and/or receive a trust distribution and, to the extent that their distribution “matches” to historic FIG in the structure, to be taxed on the matched amount at 12%. This flat rate is due to rise to 15% in 2027/2028. That scheduled increase has perhaps acted as an incentive for those who might be interested in taking advantage of the TRF to do so sooner rather than later.

The original legislation which came into effect from 6 April 2025 provided that it was necessary to “designate” the relevant amount in respect of which the TRF was being claimed. In relation to a trust distribution, this would be the amount to which the distribution is being “matched”. To the extent that the amount distributed derives from FIG (i.e. if the trust was funded with unremitted FIG), designating the amount for the TRF and paying 12% would “clean” these funds completely and remove all further income tax and CGT charges. In this form this was therefore a highly valuable relief for many people who had funded trusts with FIG.

However, the draft Finance Bill issued following the Budget on 25 November 2025 has changed these rules such that:

• where a trust was originally funded with FIG (X);
• the trust makes gains (Y); and
• the trust makes a capital payment to a UK beneficiary using X or something derived from X to do so;

the capital payment in the hands of the UK resident beneficiary now derives from both the historic FIG (X) and is matched to gains (Y).  The new drafting of the legislation means that it is necessary to make two designations – one in respect of X and one in respect of Y.  This new approach potentially raises the tax rate by up to 100% to a potential 24% – double the rate thought to apply before publication of the recent Finance Bill.

Whilst this change could be considered reasonable on the face of it – in that two untaxed pots are being ‘cleansed’ – the surprising feature of this change is that it has retrospective effect.  It therefore applies not only to distributions made after the Budget, but also to any distributions made between 6 April 2025 and the day of the Budget itself, redefining the tax payable on them. 

It perhaps goes without saying that the distributions made after 6 April 2025 but before the Budget were made on the understanding of the legislation that then applied and which provided that the recipients would be subject to tax at 12%. Now however, the recipients learn that they must pay up to double that rate.  Those who received distributions in this window who may not be relishing an increase in the tax payable of up to 100% of the original rate, may now be wondering whether they can undo them to avoid that position?

Example

Say you have a pre-30 October 2024 excluded property trust worth £150m, funded with £50m of FIG and £100m from subsequent investment growth the settlor of which is now Long-Term Resident in the UK.  Upon hearing of the new rules in April, the loss of protected trust status and the availability of the TRF, she requested that £100m be distributed to her, with £50m left for future generations of her family.  She is aware that the £100m which she receives will now be in her estate for IHT purposes, however she intends to continue to run her business in the UK until retirement in 5 years’ time and then move permanently abroad.

The settlor accepts that there will be a £12m charge under the TRF, but considers paying this worthwhile given that she will now be subject to income tax and CGT on the £100m irrespective of whether it is in her personal hands or in the trust and distributing it will cleanse it and, eventually, remove £100m from the scope of IHT.  In addition, because the assets in the trust will no longer benefit from excluded property status, on the next 10-year anniversary and every subsequent 10-year anniversary while the settlor remains Long-Term Resident, there will be a 6% charge (i.e. £9m), which would be avoided to extent distributions are made out of the trust, thereby reducing the corpus of the trust going forwards.   

The trustee sought  tax advice which correctly identified the position as at 6 April 2025, namely a 12% TRF charge payable by the settlor on the £100m of FIG and the uncapped 10-year IHT charge.  In reliance on this information and the settlor’s request, the trustee made the distribution on 1 September 2025.

Due to the announcements in the Budget on 25 November 2025, the settlor has been informed that she now has to pay two TRF charges:

• 12% on £100m which match to the historic gains in the trust – £12m; and
• 12% on £50m which derive from the historic FIG used to fund the trust – £6m.

She therefore has to pay tax of £18m at  an effective rate of 18% on the £100m distribution, rather than the expected 12% payable based on how the TRF operated at the time the decision to make a distribution was made.  To make matters worse, in addition to this, the settlor also discovers that the future IHT charges had the funds remained in trust will be less than thought given that the 10-year anniversary charge has been capped at £5M with retrospective effect from 6 April 2025.

Arguably, therefore, the settlor is in the worst of all worlds because the distribution will result in more tax being paid than expected (£6m or half as much again) and she has taken £100m out of an IHT regime which is now considerably better than when she chose to leave it (with a 10-year IHT charge of £5m not £9m).  The settlor may well think that the goalposts have been moved to her disadvantage.  What’s more, the unexpected tax charge of £6M, as well as the foregone saving of £4m on the 10-year IHT charge are, together, at £10m more than enough to justify exploring what, if any, rights may exist to challenge this position.   

Can the distribution be reversed?

On the facts of our example, the settlor cannot make a claim against the trustee, for it has acted entirely appropriately in obtaining her wishes and taking tax advice.  Nor can she (or the trustee) make a claim against the tax adviser, as the advice was correct based on the legislation as it stood at the relevant time.  Nor can the settlor easily challenge the retrospective change in the charge payable under the TRF or the 10-year IHT charge as while legislating with retrospective effect is undesirable, Parliament has the power to do so, and in the area of tax this is not uncommon, albeit it is usually targeted at retrospectively plugging holes exploited by artificial tax planning schemes.     

As a result, the settlor’s only remedy is to see whether she can work with the trustee to reverse, or ‘set aside’, the distribution thereby producing an outcome as if it had never been made.  There are two legal approaches to achieve this both of which would involve an application to court: (i) the so-called rule in Hastings-Bass, and (ii) the law of mistake. 

Hastings-Bass

The Hastings-Bass case established the principle, sometimes called a rule, that where a trustee makes a decision as a result of inadequate deliberation (in effect a breach of duty as a trustee) the court will come to the assistance of the trustee and set aside the decision if it can be established that there was some important fact or matter which the trustee ought to have but failed to take into account, and had he or she done so, this would or might have resulted in a different decision being made.  This principle has been used by many trustees who, at the time of making a decision, failed to take into account the tax implications of a particular course of action which later turn out to have serious adverse consequences.  Provided the course of action was not artificial tax avoidance, on application by the trustee the court will come to its assistance and set the decision aside thereby returning the position to what it was immediately before the decision was made.  

Mistake

The law of mistake is not limited to trustees and applies where a voluntary disposition is made as a result of a causative mistake of sufficient gravity where it would be unconscionable to leave the mistake uncorrected.  Mistake applications have become relatively common in recent years with many applications being made as a result of a misunderstanding as to the tax consequences of a particular course of action.

For an application on the grounds of mistake to succeed it is necessary to show that:

• The decision maker took a particular course of action in circumstances where it was mistaken as to some material matter concerning that course of action.
• The matter on which the decision maker was mistaken was causative, in that the decision maker would have acted differently absent the mistake.
• There was a real mistake rather than merely a mis-prediction or calculated risk taking.
• It would be unjust, unfair or unconscionable to leave the impugned transaction uncorrected.  

Are you affected by the issues addressed in this briefing?

If you are affected by any of the issues addressed in this briefing and would like to discuss with us whether the Hastings-Bass principle, or the law of mistake could be used to set aside a distribution, or some other step taken in reliance on an understanding of tax legislation which has subsequently changed on a retrospective basis with material adverse implications, please contact: