Inheritance tax avoidance using offshore trust

JohnRinson

Hi
I recently had a conversation with my accountant about inheritance tax planning relating to my mother.

She owns her own home and a couple of small investment properties, along with some cash - the value of all of which totals about £500k or so.

My accountant is proposing moving the "beneficial ownership" of the properties in to some kind of offshore trust scheme.

The details are quite vague, as he charges a fee for detailing the full details of this "trust structure".

The accountant suggests doing this would cut inheritance tax to £0 as well as protecting the properties from being sold to cover care home fees (my mother's health is deteriorating and there's a good chance she may end up in a care home over the next few years).

Does anyone have experience of such an arrangement? Whether it's legitimate (I'm assuming it is, as the accountant is fully legitimate) and whether there are any potential risks involved? Or is a good / bad idea? Thanks!

theoretica

All these schemes come with risks - especially because the government likes getting taxes and it can be a pain if you have something set up and then the legislation changes. 

At £500k is it worth it?  Your mother will have a £325k personal nil rate band and an additional up to £175k for her main home (even available if she sells up) so unless her home is worth much less than £175k there is likely to be little inheritance tax due.  Do be very sure that the limitations, fees, tax implications all add up.

As often pointed out, covering your own care home fees gives much more freedom to choose a good home than relying on the government - it isn't likely to be the same thing but just paid for by someone else.

uknick

On the basis of what you've told us I'm surprised a qualified accountant belong to one of the certified accounting bodies would suggest such a scheme.  As theoretica says, your mother's estate, as it currently stands, will not attract IHT assuming she leaves her home (or proceeds from having to sell for care home fees) to a descendent, e.g. you.

The accountant knows there will be little if no IHT to pay and as such is charging for something the client has no need of.  In addition claiming that any scheme can avoid care home fees is highly dubious.

Plus, not disclosing full details until a fee is paid, again sounds as if your accountant is not demonstrating the high level of integrity mandated by the rules governing accountants.

I'd look for another accountant, or at the very least, talk to another one who is CCAB qualified for a second opinion.  Oh, and by the way, how do you know your accountant is fully legitimate?  Did you look him up in the relevant accounting bodies register?

JohnRinson

These are interesting comments - thank you, and the fact I'm resorting to asking about this on MSE goes to show I have a few doubts in the back of my mind about the accountant's advice - although yes I do know he's a certified accountant. 

I've realised the total value of the estate is actually closer to £650,000 but sounds like it's still probably not a value that's enough to be worth what sounds like a potentially risky approach. 

Keep_pedalling

She needs a new accountant. Her IHT liability is not that high and if she isa widow then it is unlikely any tax would be due. Any transfer of those properties could also lumber her with an nice CGT bill. 

If she wants to transfer any of her assets it would be better simply to gift to children rather than some dodgy trust. 

tacpot12

You should speak to the hundreds of computer contractors who were sold offshore loans as a means of getting paid. They now owe HMRC millions of pounds and all the vendors of the schemes are getting away scott free.

Dead_keen

It stinks.  Change accountants.  This is not the "normal" sort of thing tax advisers recommend.  

Let's pretend she transferred some cash to an offshore trust.  That would be a chargeable lifetime transfer and so IHT would be due at the 20% rate.

On the tenth anniversary of the cash being transferred, there would be a IHT charge of up to 6% (and that would apply every ten years).

If value came out of the trust, there would be another IHT charge (depending how long its been in trust).

If it is property (rather than cash) then there would be CGT on the deemed market value (but may not be relevant if own home).  I have no idea about all the rules of SDRT or other taxes related to UK property held in a trust.

For the trust to be offshore, the trustee needs to be offshore.  So she would end up paying someone she doesn't know, and doesn't know her or your family, an annual fee to act as trustee.  I'd expect it to be a few thousand per year.  

Now there are some kinds of trusts that do not have to pay IHT.  There was a dodgy scheme that tried to use this exemption.  This was held to be abusive.  This means a world of pain of HMRC enquiries, paying the tax (plus up to 60% penalties) and just not having a fun time.    The facts of the dodgy IHT scheme I'm thinking of was set out in section 3 here of the GAAR Panel's opinion.  https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/883571/Case_16_Opinion_-_Anonymised_FINAL.pdf  

The scheme your mum is being touted is likely to be a bit different to the one described her but is very, very unlikely to work. 

So in summary:

1. Don't touch it with a barge pole.

2. Change accountants.  This is type of recommendation is not in any normal person's interests.  They are likely to be paid commission for promoting these dodgy schemes.

concerned4mymoney

Not sure that sounds enough assets to justify getting in to one of these schemes, which will have a cost - as things stand at the moment.

IHT threshold is £325k, but if you leave your home to your children or grandchildren then it can go up to £500k, depending on the value of your main home.

Also, you don't mention your father or whether she has/had a husband. 

When my mum died her IHT threshold was £650k, because my dad had died before her and everything he had passed to my mum, meaning we were also able to utilise his £325k threshold.

When my husband died his estate was a similar level to your mother, but there was no IHT to pay because it all passed to me as his wife.  His £325k threshold will be brought in to the calculation when I pop my clogs, as well as my £175k for my home - bringing the total threshold to £825k.

So, if my estate was below this level all I would be doing is lining the pockets of the accountant and tax avoidance specialists (after all, they are in it to make money) - and giving myself a big headache, as I believe you are supposed to notify HMRC on your annual tax return if you are using a tax avoidance scheme.

Jeremy535897

I don't believe an offshore trust structure would be relevant for inheritance tax. The key issue is alienation of property. The residence of the trustees is unlikely to affect that.

Keep_pedalling

The accountant is also wrong about care fees, any avoidance by transferring her assets would with certainty be treated as deliberate deprivation of assets. She is fortunate to be in a position to be able to self fund in a care home of her choice should she need residential care, and even if if we’re possible to hide her assets it would be a very dumb move to put your fate in the hands of a cash strapped LA.

Albermarle

Most elderly people who go into care homes , unfortunately do not become long stay residents . I think the average time is less than two years and a significant % only survive 12 months or less.

In general people paying their own care costs have more choice and better facilities, so if she has money then best to spend it on good quality care rather than trying to avoid the costs through some expensive trust set up, that the council could see through anyway .

Care costs would also reduce any IHT liability.

Regarding IHT , it is maybe a good idea for her to give money away now to family . Even if the gifts are large and she dies within 7 years , her estate will not be liable for any more IHT than it would have been if there had been no gifts .
If she survives 7 years after the gift , it is ignored for IHT purposes.