IHT and Offshore Trust

Question:

My father died leaving an estate of GBP 2 million in England. My father was UK resident and domiciled. The IHT tax bite is about 700k. The net estate goes to me and my sister in equal shares. I am UK non-resident, my sister is UK resident. The bulk of the value of the estate is tied up in the former family home in England. I have been told that it would be effective IHT planning for us to vary the will and re-direct all the residue into a UK based discretionary trust. I'm not sure what tax is payable on transfer to the trust but I believe there is a 10 year tax and, I assume, because the value paid into the trust is above our respective nil rate bands there will be an IHT charge on setting up the trust?

As I have no intention of returning to the UK can I simply assign my interest in the estate to an offshore discretionary or other trust (BVI probably) and what are the tax consequences of my doing so? For the purpose of domicile, although I have lived outside the UK for over 20 years I do have property in the UK so HMRC would probably argue that I am currently UK domiciled.

I intend to retire to Malaysia and currently live in Dubai. I would like to distance myself from the UK tax system and, if at all possible, avoid further inheritance tax on my recent inheritance either on the 10th anniversary or in the event of my death. We are now into the second year since my father dies so we need to agree on a strategy if we are not to lose the option of varying the terms of my father's will.

Your thoughts would be appreciated.

Answer:

If you're looking at a deed of variation to change the terms of the will the effect of varying the will to direct all the estate into a UK trust, would be as if your Father had himself provided for the transfer to the will. (ie there is no transfer by you). Given this, it would be classed as a trust formed on death. The £2M estate would still be subject to inheritance tax and there would be no tax charge on setting up the trust as it already formed his estate for IHT purposes.

The advantage of the trust would not be in terms of IHT mitigation for your Fathers estate but in terms of IHT mitigation for you/your sister. The £2M already forms his estate and unless the will was varied to leave assets to an exempt beneficiary (eg spouse) IHT would apply irrespective of who the assets were left to. As you state there would be a 10 yearly IHT charge to consider in the trust.

If you are a UK domiciliary and transferred assets into an offshore discretionary trust this would represent a chargeable lifetime transfer for IHT purposes. As such any amount above the nil rate band would be taxed at 20%. Your non residence status would not impact on this.

If you could establish non UK domicile you could consider holding any UK assets via an offshore company and transferring the shares in the company to an offshore trust. This would then be an excluded property trust and outside the scope of UK IHT. You'd probably need to arrange for an extraction of assets from any UK trust into your name before you could transfer into an offshore company.

In terms of avoiding IHT for you, establishing non UK domicile status would be likely to be one of the preferred options.

About the Author

He worked in Ernst & Youngs Entrepreneurial Services department for a number of years before setting up his own tax planning practice. He is now a full time tax author.

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