A table of six UK Expats were debating the new Tax rates being levied on inheritance (IHT) by the UK’s HM Revenue & Customs (HMRC) as of the 6th of April 2017. Whilst the debate seemed, at first, animated they were indeed showing signs of anger to a point at which the establishment’s management asked them to leave.
It appeared to me that people believe the HMRC has a duty to advise, in advance, of pending Tax changes. In essence I agree when it comes to IHT (specifically relating to inheriting the family home) because people need to plan for their heirs not to pay the obscene Tax being imposed on their estate. When you consider the investment was already net of Tax, which means one’s parents had the foresight to invest prudently their hard earned money and now the Tax man wants his share (once you’ve deducted the not so generous inheritance tax allowance). It is indeed most disturbing when one’s children may have to sell their parents’ home, especially if it’s where they were raised, should they not have the ability to meet the Tax demanded of them.
This subject is indeed very emotive but I was aghast to listen to the arguments, by my fellow Starbucks frequenters, that they were more miffed, not by the above moral issue, but by the new powers bestowed on HRMC in unravelling the multiple layers of their offshore structures. Ostensibly, this enables the Tax man to “see through” these vehicles establishing who is the ultimate beneficial owner (often referred to as “enveloping”) and charge IHT on the assets within the structure on death. The family home, in most cases, is the pinnacle grief heirs have when debating the IHT and secondary, all other assets contained in the estate at large.
Found you!
Many decades ago, like hide and seek, it was fair game and legal (and still is) to use such offshores structures, namely Foundations/Trusts, for honourable accession planning. More often than not these legal entities were incorporated in Tax Jurisdictions that often afforded favourable tax conditions.
However, in recent times these structures have been usurped by the non-UK domiciles to invest in the UK property through the usage of offshore company structures or trusts. The most obvious rationality in using such opaque structures is that up until now all assets held in such environments were exempt of IHT.
With the introduction of UK’s IHT set at a rate of 40%, this tax saving is significant and has enabled investors to take advantage of the favourable UK property market in an enviable legal tax-efficient manner. However, the game changer has been the new legislation imposed in this year’s government budget.
For example, if one invested in a property in UK through an offshore structure (Without wishing to debate the origin of funds entrusted into these structures) and the property has a market value of £3 million, the IHT charge will be as follows:
| Before 6th April 2017 | After 6th April 2017 | |
|
£3 million passed on to beneficiaries at zero IHT liabilty |
£3 million passed on to beneficiaries, upon death, the IHT liable on the property at 40% of the £3 million. |
|
| Tax charge: £0 | Tax charge: £1.2 million |
(The above is a simplified example and does not include any tax deductions and potential allowances that maybe applicable)
I love solicitors
Why I am not surprised? As one knows in the UK we need to go through a relatively long probate process before the beneficiaries have access to the inherited assets. For good measure the heirs will need to first of all pay the IHT coupled with the probate fee, irrespective of whether they have the means or not – seems fair?
The probate fee was, pre budget, a flat fee of £215, but it is envisaged to rise substantially. I was reading an article regarding the proposed punitive increase and what I was able to glean was an example given and I quote; “In the UK, The probate fee is currently a flat fee of £215 (or £155 if using a solicitor), but will rise dramatically in May 2017, with estates above £2 million seeing the fee rise from £215 to £20,000 – that’s a 9,000% increase!” End quote.
Is there a silver lining?
YES, is the answer. However, not all cases are identical and there is no magic wand. The change in legislation and hike in probate fees will make estate planning an important aspect for more people, and many non-UK domiciles will now need to plan for a future UK IHT liability for the first time.
This communication is for informational purposes only and is not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice from a professional adviser before embarking on any financial planning activity. Whilst every effort has been made to ensure the information contained in this communication is correct, we are not responsible for any errors or omissions.
To help tax authorities in various countries hunt out those individuals and companies trying to hide assets, the UK has recently signed a disclosure of asset agreement with Spain, Germany, France and Italy. What does this mean? It means that the UK, in partnership with France, Germany, Spain and Italy, have passed regulations that will lead to the automatic sharing of information about the true owners of companies, complex shell companies and overseas trusts.