Lawyer, Family Office
Concept
A South Dakota dynasty trust is a showcase of US planning: an irrevocable trust with no expiry (the state repealed the rule against perpetuities), creditor protection, state income-tax savings and, above all, a GST exemption that carries assets across generations past federal estate and generation-skipping transfer tax. While the settlor and beneficiaries live in the US, the structure works exactly as designed.
The break comes at relocation. A dynasty trust is built for US law and silently assumes a US tax environment too. The moment the settlor or a key beneficiary becomes tax-resident somewhere else — take the United Kingdom as the most common and most instructive case — the local anti-avoidance machinery switches on, written precisely so that a foreign (from its standpoint) trust delivers no deferral.
For the UK that means four pillars: the Settlements Code (ITTOIA 2005, s.624 ff.) for income tax; the Transfer of Assets Abroad code (ITA 2007, s.720/731); s.86 and s.87 TCGA 1992 for capital gains; and — from 6 April 2025 — the new residence-based inheritance tax regime that replaced the link to domicile. Let us walk through what each does to a US trust, and what the structure still delivers.
Where a dynasty trust is strong — and why that strength is domestic
A dynasty trust's strength is written in the language of US law. South Dakota places no limit on a trust's life, so assets can stay inside it for generations. A GST exemption (running to several million dollars per person) applied correctly at funding shelters all future growth from estate and GST tax at each succeeding transfer. Add the absence of state income tax, strong asset-protection legislation and privacy, and it is clear why the tool became a standard for wealthy American families.
But those very virtues — perpetuity, multi-generational transfer, protection — are framed in US-law terms. Another jurisdiction looks at the same trust through its own eyes. To it this is a foreign trust, and the only question is whether it lets a local resident defer or remove tax. Anti-avoidance rules are written so the answer is no.
Income and CGT: the country of residence takes back the deferral
The central illusion is that income and gains locked inside a US trust stay invisible to the tax authority of the country of residence until something is distributed. In the UK that is not so: three attribution mechanisms operate at once.
Settlements Code (ITTOIA 2005, s.624 ff.)
If a UK-resident settlor has retained an interest in the trust — and in a typical dynasty trust the settlor and/or spouse remain among the potential beneficiaries — the trust's income is treated as the settlor's own for income-tax purposes and taxed on them as it arises, regardless of distributions. That is the Settlements Code: it targets settlor-interested structures, and a classic US discretionary trust falls within it almost automatically.
Transfer of Assets Abroad (ITA 2007, s.720/731)
The ToAA code is a wider net. s.720 attributes a foreign structure's income to a UK resident who transferred assets and can benefit; s.731 catches those who receive benefits, even without being the formal settlor. For a family that moved to Britain with a pre-existing US trust, this means the trust's income can be attributed to the resident even where the Settlements Code, for whatever reason, does not bite.
Capital gains: s.86 and s.87 TCGA 1992
Gains have their own rules. s.86 attributes a non-resident trust's gains to a UK-resident settlor who retained an interest. Where s.86 does not reach, s.87 takes over: gains pool in the trust and are taxed on resident beneficiaries as they receive capital payments, often with a supplementary charge for the deferral. The result is the same: the built-in gain inside a dynasty trust stops being invisible to UK CGT.
The end of protected settlements (from 6 April 2025)
Before April 2025, trusts created by non-domiciled individuals before they became deemed-domiciled enjoyed protected-settlement status: foreign income and gains inside the trust were not taxed while they stayed inside and were not distributed to the resident. That was the shelter people often counted on. The non-dom reform removed it. From 6 April 2025 protected-settlement status is abolished: once the settlor is a long-term resident, the trust's income and gains arising after that date are taxed on them under the ordinary rules — the Settlements Code, the ToAA code and s.86/s.87 apply without the former relief.
IHT is now residence-based: the trust falls into relevant property
The most serious change is to inheritance tax. From 6 April 2025 the historic link to domicile was replaced by a residence test. This rewrites the fate of any foreign trust behind which stands a settlor who has lived in Britain for a long time.
Long-term resident: the 10-of-20 test
An individual becomes a long-term resident for IHT after being UK tax-resident for at least 10 of the previous 20 tax years. From that point IHT applies to their worldwide estate — as it once did to a domiciled person. The status also trails on departure: the tail runs from three years (for those resident 10–13 years) up to ten years for those resident 20 years or more.
Relevant property: entry, ten-year and exit charges
From 6 April 2025 a trust's status mirrors the settlor's. If a trust is settled or funded by someone who is a long-term resident, its non-UK assets fall into the relevant property regime: a possible entry charge on funding (at the lifetime-chargeable-transfer rate — up to 20%), then periodic charges every ten years (up to 6% of value) and exit charges when assets leave. For a long-standing dynasty trust this means the settlor's move to Britain and crossing the LTR threshold can pull the whole trust into the orbit of UK IHT.
A separate layer is gift with reservation of benefit. Because the settlor in a dynasty trust usually stays among the beneficiaries, they have reserved a benefit in the property given away. Under the GWR rules such assets are treated as remaining in their estate and charged to IHT at 40% on death — alongside the relevant-property charges at the trust's own level. An economic overlap of the two regimes can arise.
Application
Does this make a dynasty trust useless on relocation? No — but it should be viewed honestly, as a tool with a US, not an international, payoff. Its real value survives in three things. Asset protection: South Dakota's creditor-protection law works regardless of where the beneficiary lives. The GST exemption: for US tax purposes the trust still carries assets across generations past estate and GST tax. Avoiding US probate: assets held in trust do not pass through the American probate process.
The practical takeaway is to design or revisit the structure before relocating, not after. It is a question of timing: when the trust is created and funded, when the long-term-resident threshold is crossed, and which destination country is chosen — anti-avoidance rules may be softer or harsher than in the UK. The choices are individual and call for coordinated advice on both sides of the border; there are no blanket guarantees here.
Risks
A second layer of risk is compliance and double taxation. The American stays within the orbit of US tax and citizenship-based reporting (for the IRS such a trust is usually a grantor trust, transparent, with Forms 3520/3520-A) and at the same time falls under UK rules. Reconciling two regimes without leakage is not always possible: in places a foreign tax credit will absorb the overlap, in others it will not, and then the same income is genuinely taxed twice. This is not a flaw of any particular trust but a structural asymmetry to be modelled in advance.
FAQ
Short answers to what American families most often raise before relocating.
I live in the UK and the trust distributes nothing — surely there's no UK tax?
There is. The Settlements Code (ITTOIA 2005, s.624 ff.) taxes a settlor-interested trust's income on the resident settlor as it arises, with no distributions needed; the ToAA code (s.720/731 ITA 2007) does the same. Gains are reached the same way by s.86 and s.87 TCGA 1992. The fact that income is locked inside the trust does not stop UK tax.
Doesn't protected-settlement status shelter the trust's foreign income?
Not from 6 April 2025. The non-dom reform abolished protected-settlement status. Income and gains arising after that date are taxed on a long-term-resident settlor under the ordinary rules. The shelter genuinely existed before the reform; it can no longer be relied on.
When do the trust assets come within UK inheritance tax?
When the settlor becomes a long-term resident — that is, UK tax-resident for 10 of the previous 20 years. From 6 April 2025 the trust's status mirrors the settlor's, and an LTR trust's non-UK assets become relevant property: an entry charge up to 20%, ten-yearly periodic charges up to 6% and exit charges. If the settlor kept a benefit, gift with reservation and 40% on death are added.
Is there any point keeping a South Dakota dynasty trust after relocating?
The point shifts from tax saving to other functions. Asset protection under South Dakota law remains, as does the GST exemption for US tax purposes and the avoidance of US probate. The trust gives no tax deferral abroad. Whether to keep the structure depends on which of these functions matter most to the family, and is best decided before the move.
Does changing country help — somewhere other than the UK?
Anti-avoidance rules are sometimes softer, sometimes harsher than Britain's, but the principle is universal: developed jurisdictions attribute a foreign trust's income and gains to their own residents and tax the estate under their own rules. There is no universally safe place — the choice of country and the timing of the move must be modelled for the specific family, with no promise of outcome.