The following case study illustrates a typical Inheritance Tax (IHT) planning issue for UK domiciled clients along with potential solutions. A full fact find would need to be completed to assess suitability of the potential solutions by the adviser. The solutions are based on exemptions and allowances available under the rules in force at the date of this article for the tax year 2015/16.
Mario is 52. He is Italian, but has been living in England for the past 14 years with his British wife and their 2 children in their £450,000 house. Mario has savings held in an offshore bank account and has to pay income tax on the interest earned each year. He also is the main provider for his family and wants to provide for his family if he should pass away.
What IHT, succession and income planning options are available?
Mario is not yet deemed UK domiciled as he has not been UK resident for at least 17 out of 20 tax years, so he could move the offshore bank account funds into an offshore bond with Old Mutual International and assign it to a settlor included discretionary trust. From 6 April 2017, irrespective of when someone arrived in the UK, those who have been resident in the UK for 15 out of the past 20 (the 15 year rule) tax years will be treated as deemed UK domiciled for all tax purposes. This means that they will no longer be able to use the remittance basis of taxation and will be deemed UK domicile for IHT purposes.
Mario’s investment will benefit from gross roll-up and will be free from income tax and capital gains tax, although there may be withholding tax on certain underlying assets.
He can withdraw up to 5% of the capital each year without triggering a chargeable event and will only pay income tax in a tax year that he does trigger a chargeable event, if at all. Life and redemption bonds are not subject to capital gains tax and therefore an encashment from the bond will be free from capital gains tax.
As a non UK domiciled person, Mario will only be liable to IHT on UK situated assets. When he becomes UK deemed domiciled he will be liable to UK IHT on his worldwide assets.
By assigning the bond into a settlor included discretionary trust whilst non-UK domiciled, Mario will be creating an excluded property trust on his offshore bond. This means that even where Mario remains UK resident the bond will not be included in his estate for IHT even though he is still able to benefit from the trust. This is because he is creating a trust before he becomes UK deemed domiciled and the trust fund is held outside the UK.
Finally, Mario could take out an Old Mutual Wealth Life Assurance Limited Guaranteed Whole of Life Protect policy and make this subject to a settlor excluded Protection trust and make his wife joint trustee so on his death the sum assured will pay out to the wife as the surviving trustee (and possible beneficiary along with the children) but will remain outside his estate for IHT.
- Premiums paid into the Protect policy would be chargeable lifetime transfers if not otherwise exempt through the annual exempt amount of £3000 or normal expenditure out of income exemption.