IHT planning and using an offshore trust - USERNAME: C2 - 07/06/2012
Tax Question:
I was born in the UK and am a British Indian. My father however was born in India [as was his father] and despite living here for more than 17 out of twenty years now, I am under good advice, given his strong links with India he could qualify as non UK-domiciliary for tax purposes. This is especially pertinent as he genuinely visits all the time and may settle back there one day [hence keeping his Indian passport all these years]!
We do however have two issues. One is inheritance tax planning. My father having worked hard has built up a small portfolio of investment properties and 2 houses. These are obviously above the combined IHT threshold by a significant amount I should imagine [by at least 500K plus]. He cannot of course gift them to me without triggering a significant CGT on disposal and without planning a significant IHT problem looms.
I read with great interest on your site, how using a combination of being non-dom and the double tax treaty with India, could potentially put his UK estate out of UK IHT consideration by making a transfer to say a overseas trust or SPV in Jersey for example.
a] Am I correct in believing this does NOT need to be below the 650K threshold? b] Are there any CGT charges if he settles his UK estate into an offshore trust? c] If so how can this be mitigated?
Secondly. In a separate issue I have an aunty resident in India, who is widowed with no children and is looking to sort out her estate. She is potentially going to set up an off shore trust with cash, with off shore trustees and off shore protector, with me as the sole beneficiary. I will use this purely for investment purposes.
a] What are the tax implications if my non-dom father transferred his UK estate into the trust settled for me by my aunty using the above means described?
b] What if he used the above means to transfer his estate to my aunty and then she later settled this into a trust for me as the sole beneficiary?
i.e. Is there an effective way to marry the two concerns? Should I too pursue changing my domicile status?
Thank you in advance and i look forward to your answer.
Answer:
I read with great interest on your site, how using a combination of being non-dom and the double tax treaty with India, could potentially put his UK estate out of UK IHT consideration by making a transfer to say a overseas trust or SPV in Jersey for example.
a] Am I correct in believing this does NOT need to be below the 650K threshold? b] Are there any CGT charges if he settles his UK estate into an offshore trust? c] If so how can this be mitigated?
As I understand it the terms of the double tax treaty effectively ensure that foreign assets of a UK deemed domiciliary could still remain outside the scope of UK tax. If there was a transfer of UK assets to an offshore company/trust this would still be a CLT and therefore the transfer would need to be below his remaining nil rate band.
Yes, CGT would still be an issue unless he could arrange to be non UK resident and meet the 5 year requirement.
Secondly. In a separate issue I have an aunty resident in India, who is widowed with no children and is looking to sort out her estate. She is potentially going to set up an off shore trust with cash, with off shore trustees and off shore protector, with me as the sole beneficiary. I will use this purely for investment purposes.
a] What are the tax implications if my non-dom father transferred his UK estate into the trust settled for me by my aunty using the above means described?
The trust would be an excluded property trust (non dom settlor settled with foreign assets). However if UK assets were transferred into the trust these would be subject to the usual UK IHT regime for trusts - unless he used an offshore holding company.
Any transfer by your Father would be a chargeable lifetime transfer for IHT purposes (and CGT would need to be considered).
b] What if he used the above means to transfer his estate to my aunty and then she later settled this into a trust for me as the sole beneficiary?
The transfer to yoru Aunty would be the key issue for your Father and would need to be considered in terms of IHT and CGT. The settling of the assets from your Aunty to you should be free of IHT.
Should I too pursue changing my domicile status?
This wouldn't impact on the IHT position of your Fathers estate - but would certainly impact on the tax position on the extraction of funds from the offshore trust.
Ensuring that where possible you retain strong links to India could therefore be very attractive in terms of reducing UK tax in the future.
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About the Author
The Author of this article/answer is our site Editor, Lee Hadnum. Lee is a rarity among tax advisers having both legal and chartered accountant qualifications. After qualifying a prize winner in the Institute of Chartered Accountants exams, he also went on to become a chartered tax adviser (CTA).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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