Jessica Jarvis

Offshore trusts have long been a way for wealthy individuals – especially those who move between countries – to manage their money. But as governments crack down on tax avoidance, the rules around these structures have become far more complicated.

One recent case, Valesca Louwman v HM Revenue & Customs ([2025] UKFTT 295 (TC)), shines a spotlight on the challenges people face when they have offshore wealth and become long-term UK residents. This case shows how easily things can go wrong if you don’t keep up with the rules.

Let’s Recap

An offshore trust is a legal arrangement where someone (the settlor) places assets into a trust, which is managed by trustees, often based in another country with more favourable tax laws. The beneficiaries of the trust – who might be family members – may eventually receive income or capital from it.

People use offshore trusts for a variety of reasons:

1) To protect family wealth.

2) To manage assets internationally.

3) Historically, to reduce taxes, although modern rules have made this harder.

If you’re not domiciled in the UK (meaning your long-term home is elsewhere), you could have your offshore income and gains taxed only if they’re brought into the UK. That’s the remittance basis of taxation.

But after living in the UK for many years, you can become deemed domiciled, and that’s where things get tricky.

What Changed in 2017?

The UK changed the rules for non-doms (people not domiciled in the UK) in 2017. If you’ve lived in the UK for 15 of the past 20 years, you become deemed domiciled. When that happens:

– You’re taxed on your worldwide income and gains, not just money brought into the UK.

– Offshore trusts you created while you were non-domiciled get special treatment – but only in certain situations.

The government promised to protect foreign income in trusts from immediate UK tax – unless you or your family actually benefit from the trust (e.g., by receiving money from it). This special treatment is known as Protected Foreign Source Income (PFSI).

But not all kinds of income qualify for this protection.

The Valesca Louwman Case

The Background

Ms Louwman is originally from the Netherlands and had set up a number of offshore trusts before becoming deemed domiciled in the UK in 2018. These trusts held a wide range of investments, including:

• Offshore funds

• Foreign securities

The trusts made money from:

1. Offshore income gains (OIGs): profits from selling offshore investment funds.

2. Accrued income profits (AIPs): a type of interest profit when certain securities are sold.

The Dispute

Ms Louwman argued that these profits should be protected from UK tax under the PFSI rules, because:

• They arose in offshore structures.

• They were foreign income from investments she had put into place before she became deemed domiciled.

HMRC disagreed. They said:

• Not all foreign income is automatically protected under PFSI.

• The types of profits she was talking about (OIGs and AIPs) were deemed income – in other words, profits that the law treats as income for tax purposes, even though they might not traditionally be thought of as “income.”

• The law doesn’t specifically protect these types of income once someone becomes deemed domiciled in the UK.

The Tribunal’s Decision

The First-tier Tax Tribunal agreed with HMRC. It ruled that:

• OIGs and AIPs do not count as Protected Foreign Source Income (PFSI).

• The PFSI rules only cover certain types of foreign income, not all foreign income or gains.

• Just because income is deemed to arise in an offshore trust doesn’t mean it’s protected.

• The law was deliberate, and there was no mistake that needed fixing.

In simple terms: Ms Louwman’s trusts had made the wrong kind of foreign income to be protected. As a result, she was liable to pay UK income tax on the profits immediately – even though she hadn’t received any benefit from the trusts.

What Does This Mean in Plain English?

1. The Rules Are Narrower Than Many Thought

Many people believed the PFSI rules would protect most, if not all, foreign income in offshore trusts. This case shows that isn’t true.

2. Even Offshore Trusts Can Trigger UK Tax Bills

Just because you set up a trust abroad before becoming a long-term UK resident doesn’t mean the income stays safe from UK tax.

3. It’s Not Just About Where the Money Is

Even if income comes from offshore investments, it may not get the special protection unless it falls into specific categories.

Why This Matters

If you or your clients have offshore trusts, especially if you (or they) are now deemed domiciled in the UK:

• You need to review your trusts urgently.

• Some types of investment income won’t qualify for protection and might lead to unexpected UK tax bills.

• HMRC is actively enforcing these rules.

This case highlights the importance of getting good advice and understanding what counts as protected and what doesn’t.

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A Quick Example

Imagine you moved to the UK 20 years ago and set up a trust in Jersey before becoming deemed domiciled. If that trust makes money from selling offshore funds or from certain foreign bonds, you might think you’re safe from UK tax – until HMRC comes calling. This case shows you could be taxed immediately, even if you haven’t received a penny.

What’s Next?

This ruling may prompt:

• More people to reassess their offshore arrangements.

• Further legal challenges, especially if people think the rules are unfair.

• Calls for clearer legislation, because the distinction between what’s protected and what isn’t isn’t obvious.

Key Takeaways

* Not all offshore trust income is protected when you’re deemed domiciled in the UK.

* Offshore income gains and accrued income profits are specifically excluded from protection.

* If you have offshore trusts, make sure your structures are up-to-date with current law.

* Professional advice is essential – the rules are complex, and mistakes are expensive.