BRITISH EXPATS - UK Inheritance Tax (IHT) Solutions using Trusts

Solutions using Trusts

BRITISH EXPATS

The greater majority of British Expats are UK domiciled or deemed to be UK domiciled and as such they are liable to IHT on their worldwide assets. The current IHT rate is 40%.

The Nil Rate Band per individual is GBP 325,000 which means that everything over this amount is taxed at 40% on death.

As an example: With a typical estate value of GBP 2 Million (house, investments etc.), after the nil rate band has been taken into account, GBP 1,675,000 would be liable to IHT at 40%. The resulting IHT bill would be GBP 670,000.

Solutions using Trusts

To be effective from an IHT position there must be some restriction placed on the amount of access the Settlor has on the assets placed in the trust. If there is unrestricted access the IHT planning will fail as nothing has been given away and the Settlor would be a beneficiary.

Where IHT planning and access are required a Loan Trust or a Discounted Gift Trust can help to some degree.

Loan Trust

With a Loan Trust the Settlor is not a beneficiary but is entitled to repayment of their loan. Any growth on the value of the initial investment within the trust is immediately outside of the Settlor’s estate for IHT purposes.

On death any outstanding loan forms part of the Settlors estate for IHT purposes.

It should be noted that a Loan Trust is neither a Potentially Exempt Transfer (PET) nor a Chargeable Lifetime Transfer because nothing is given away on creation of the trust.

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Discounted Gift Trust

A Discounted Gift Trust (DGT) is normally used in conjunction with an offshore investment bond issued by a life company.

With a DGT the offshore bond is gifted into the trust and held for the benefit of the nominated beneficiaries, whilst providing the Settlor with a series of withdrawals (retained rights) which are payable for life unless the trust fund is exhausted prior to death. These withdrawals must be specified at outset and cannot be varied thereafter. If the withdrawals are not spent they will simply increase the value of the estate.

Before the trust is set up the Settlor’s life is underwritten to establish if they are insurable (in accordance with HMRC guidelines) and thus attaching a value to their retained rights. These retained rights are then not deemed to be part of the gift they have made to the trust for IHT purposes and as such the IHT value of the ‘gifted fund’ is discounted.

Should the Settlor die within seven years of creating the trust and provided they were deemed to be insurable HMRC should agree to ‘discount’ the value of the transfer by the value of the Settlor’s retained rights.

The ‘gifted fund’, which is effectively the remaining portion of the initial investment less, the ‘retained rights qualifies as a PET and therefore free of IHT after seven years.

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Gift Trust

This is the simplest form of IHT planning. The Settlor passes property/investment by way of gift to the trustees for the benefit of the chosen beneficiaries. You should only consider a Gift Trust if you do not require access to the property/investment in the future.

This form of trust is widely used when establishing a Whole of Life assurance policy with the aim of the sum assured covering some or all of the IHT liability.

On death the life cover is paid to the trust allowing the trustees to ensure that IHT liability (or amount of IHT that it represents) to be settled.

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