Understanding trusts and avoiding IHT

hermante

I'm trying to gain a basic understanding of how to mitigate IHT. But there is a lack of specific information online and on gov.uk, which is normally very good for personal tax matters.

Everyone talks about trusts. From what I've learned, the basic principle seems to be that trusts have their own NRB, meaning individuals can effectively get a new NRB every 7 years. So a couple putting £1.3m into a trust every 7 years would pay, I believe, a 10% overall entry charge as half is at 0% and half is at 20%; then 3% every 10 years, which isn't too bad. Of course, that assumes tax rules don't change, and ignores the ability to give your assets away directly for no tax as long as you don't die early. Furthermore trust income is mostly taxed at 45% so that doesn't seem to help with cutting tax.


Onto my actual question in this post - my wife and I have around £1.5m in the UK now, the bulk of which was from getting lucky on AIM and Nasdaq trades (money now moved to "less risky / less volatile" index funds so unlikely to grow explosively here onwards). Based on my reading, pretending that rules stay the same for the next 50 years, I don't think we need to do anything about IHT. We'd just spend most of it and give the rest to our children (currently 3 and 1) in advance. The aim would be to end up with less than £650k or £1m in our estate before death. If we both die early, bad luck, 40% IHT beyond the NRB is probably what we would have spent on life had we not died. All this money was made in the UK, and tax was already avoided via ISAs, so fair enough.

However, I may receive an approximately £5m inheritance from a relative outside the UK in the upcoming future. This money will have had nothing to do with the UK, so I don't see why the UK should get 40% when we die. So much so that we are seriously considering moving to one of several countries with no inheritance tax, even if the day to day taxes are higher than the UK. There are other reasons for moving too. (Yes I'm aware that we may not lose UK domicile immediately upon moving.)


What I'm trying to find out now is if there are any serious strategies to reduce this potential IHT on £6m, in order to I fully understand the consequences of moving country. The problem is I can't find any advisors who will educate me and answer non-specific questions. They all want £5000 or so to devise a complex web of structures, even after I made it clear I'm not looking for advice on how to invest the money.

I would like to compare the advice from at least 3 advisors, but given the other reasons for moving it's probably 90% chance of going, I don't want to waste £15k on something we don't actually want. So I wonder if anyone on this forum can suggest the general gist of what might possibly be suggested for mitigating the possible IHT  in the situation I've described, and how effective it might really be? Is what I've written regarding trusts in the 2nd paragraph correct?

Keep_pedalling

Well one of the simplest would be to do a deed of variation passing on some of your inheritance to your children before it actually becomes part of your estate, or just enjoy yourself and blow the lot. 

Your comment on why should the UK benefit from money inherited from another country is a bit odd, if you apply that principle to the UK should you not also apply it to yourself as well? After all you have had nothing to do with earning it either.

Jeremy535897

I don't know whether you can actually discuss this with the person who will leave you the money? If you can, it may be that they could set up a trust that would keep the assets out of the UK inheritance tax net while allowing you and your family to benefit. The tax in their country would have to be considered.

hermante

Keep_pedalling said:

Your comment on why should the UK benefit from money inherited from another country is a bit odd, if you apply that principle to the UK should you not also apply it to yourself as well? After all you have had nothing to do with earning it either.

This is a very "British" point of view. While I understand where it comes from, I'm not originally British and for us, family is the base unit, so money earned by anyone in the family is treated as belonging to everyone in the family. For example my salary belongs to my parents if they want it (I suppose it's easy to say when there is a very low chance they actually need it). So I kind of have an obligation to this relative to "look after" his money after he passes away by not letting it get taxed, even though the tax wouldn't apply until the next generation. Feel free to disagree with this way of thinking, of course.

Jeremy535897 said:

I don't know whether you can actually discuss this with the person who will leave you the money? If you can, it may be that they could set up a trust that would keep the assets out of the UK inheritance tax net while allowing you and your family to benefit. The tax in their country would have to be considered.

Yes, well, my OP is a summary of that discussion. What I have not yet said is that they live in an unreliable jurisdiction and they want the money out of there before they die, as they have no way of spending it all yet they want to continue living there.

So the choices are find a way to avoid UK IHT as far as reasonably possible, or leave the UK for another western country with no IHT. As I said, we are already making plans to leave the UK, but I just want to find out what could actually be done in the UK.

I guess your idea would work if we set it up in the third country, will have to research that.

Jeremy535897

Depending on the rules applying in the unreliable jurisdiction, it would seem sensible for them to create a trust in a tax haven and transfer a good proportion of the assets into it. They could benefit from the trust, and so could the whole family. So long as the assets are situated outside the UK, and the settlors are not UK domiciled or resident, the trust should remain outside the UK tax net. If the trust is not set up to avoid UK income tax, the trustees should be able to pay money to you tax free even if you stay in the UK, but this a very simple rendition of some extremely complex rules. For the amounts involved, I would be looking at advice from one of the specialist tax barristers.

Albermarle

So I kind of have an obligation to this relative to "look after" his money after he passes away by not letting it get taxed, even though the tax wouldn't apply until the next generation. Feel free to disagree with this way of thinking, of course.

Understandable that you want to look after his money in a responsible way, but I would say paying some tax on it is a responsible way for a wealthy person. Without tax there would be no states/governments and the world would be anarchy.

On a more practical note, one way to reduce IHT bills is to give money to charity. Gifts to charity, either pre death or in a will, are discounted completely for IHT purposes, and if the amount is more than 10% of the estate, then IHT tax on the remaining amount is reduced from 40% to 36%. Plus of course the gifts will put the money to better use than just sitting in an offshore bank somewhere.