Regulations have been made which will increase HMRC’s official rate of interest (ORI) from 2.25% (the current rate) to 3.75% per annum, with effect from 6 April 2025._¹ 

This follows announcements made at the UK’s Autumn Budget on 30 October 2024 (which were perhaps somewhat overshadowed by the headline grabbing reforms to the UK’s “non-dom regime”, announced at the same event). These announcements trailed that increases to the ORI “may” take place from 6 April 2025 and thereafter will “continue to be reviewed on a quarterly basis” (currently, increases to the ORI typically only occur on a yearly basis). 

The ORI increase will be relevant to individuals and entities (including trustees and beneficiaries) who enter into or already have in place certain types of loan arrangements or arrangements involving the use of certain trust assets. A couple of key circumstances where the ORI increase will be of practical effect are as follows.

    1. Loans, or the granting of the use of trust assets, by trustees of offshore trusts to UK resident beneficiaries

If a loan from a trustee of an offshore trust to a UK resident beneficiary is made on less than commercial terms (assessed in accordance with the ORI), the beneficiary receives a (potentially) taxable benefit. This benefit may be taxable in the UK by reference to undistributed income or gains within the trust under the “matching” rules. The taxable benefit received is the difference between the actual interest paid in that tax year and that which would have been paid if calculated in accordance with the ORI. It is therefore sometimes desirable for the loan to be subject to the payment of interest at the ORI (which must be actually paid and not just rolled up), to avoid a taxable benefit arising (although the choice as to whether to charge interest and at what rate will depend on a variety of factors; for example, whether it is sensible to put income back into the structure).

Similarly, where trustees of offshore trusts grant UK resident beneficiaries the use of non-real estate trust assets - for example, a car or a painting – an annual taxable benefit arises to the beneficiary. This is calculated by applying the ORI to (broadly) the market value of the asset at the time it was acquired (less any contribution the beneficiary makes to the trustees for the use or maintenance etc. of the asset). Accordingly, the annual taxable benefit can be mitigated if the beneficiary pays a rent for their use of the asset, with the annual taxable benefit fully reduced if the rent paid is the equivalent of this.

These particular rules will not be materially affected by the changes to the non-dom regime incoming from 6 April 2025. Trustees and beneficiaries with relevant loan arrangements in place, or who are considering entering into new ones, should therefore be aware that the “commercial” rate of interest will, from 6 April 2025, be significantly higher than at present (as will the value of any taxable benefit generated where interest at the ORI is not charged). Similarly, where relevant trust assets are used by beneficiaries, beneficiaries should be made aware that their annual taxable benefit, or corresponding annual rent, arising from such arrangements, will be increased.

2. Loan arrangements between settlors and trustees of “protected settlements”

Another relevant situation will be where loan arrangements have been entered into between settlors and trustees of “protected settlements” (i.e. offshore trusts created by non-UK domiciled settlors, which, currently, post 5 April 2017 and until 6 April 2025, benefit from certain income tax and capital gains tax protections). Under existing rules, these protections cease to apply where (broadly) the settlor, once they have become deemed domiciled in the UK, makes an addition to the trust (also known as “tainting”). An “addition” in this context can include a loan from the settlor to the trustees, unless the trustees actually pay interest on the loan at least annually at a rate not less than the ORI.

Whilst the protected settlements regime is effectively being abolished from 6 April 2025, meaning that “tainting” will no longer be an issue from that date, trusts which currently fall within the “protected settlements” regime may well have the above type of loan arrangements already in place. It should therefore be noted that interest payments pursuant to such arrangements will increase from 6 April 2025, where such arrangements remain on their current terms.

Next steps 

Given the upcoming increase in the ORI, it is advisable that existing loan and asset-use arrangements involving offshore trusts are reviewed and affected parties made aware of the practical implications. In some cases, it may be that current arrangements can be revisited (although, whether or not this is beneficial will depend on the exact circumstances; additionally, where a loan is concerned, this will be subject to its existing terms and any restructuring should not be undertaken without professional advice). 

The Government, in their Autumn Budget announcement, indicated that: “As of 6 April 2025 the official rate of interest may increase, decrease, or be maintained throughout the year”. It may therefore be that further changes to the ORI are to come as the next tax year progresses.

[1] These regulations will not affect the modified official rates that apply in relation to Japan and Switzerland, which are separately prescribed.