Estate Planning For Expats

Inheritance tax planning

UK inheritance tax (IHT) is a tax charged on a UK domicile’s estate when they die. It can also apply to certain gifts you might have made during your lifetime. Exactly who will be liable for IHT is a complicated matter but, in very general terms, it will apply to those living in the UK at the time of death, and some who have previously lived in the UK.

For expats, it is particularly important to think ahead when it comes to estate planning and inheritance tax, as you have the added complication of living in a different country and the possibility of returning and/or moving to another country, in which case your financial affairs could be become even more complex.

IHT is currently charged at a rate of 40% on the value of your estate which is above the nil-rate band threshold (frozen at £325,000 until 2018).

Your estate is basically everything you own in your name or your share of everything you own jointly. It includes your main property, any additional property, cars, boats, life assurance policies, any investments, any personal effects such as jewellery, any assets held in trust which you can benefit from, and any gifts made where you keep back some benefit (gifts with reservation).

Planning to mitigate inheritance tax
Churchill & Partners can help you with regard to how to reduce inheritance tax liability and explore a number of potential ways of lessening the blow. One way is to make use of any appropriate IHT exemption: annual exemption, normal expenditure, small gifts, gifts to charities, to name but a few.

There are also a number of IHT mitigation schemes available from a multitude of providers which have stood the test of time.  Using trusts to mitigate inheritance tax is a well-established approach, and below is a brief summary of two such examples which use trusts.

The Loan Trust
The loan trust is an investment whereby you loan a lump sum to your appointed Trustees. This allows you (the settlor) access to the value of the outstanding loan whilst any growth on that sum is immediately outside your estate.

The Discounted Gift Trust (DGT)
This is a scheme which allows you as the settlor to make a lump sum gift to your chosen beneficiaries, whilst retaining a right to receive regular withdrawals during your lifetime.

One of the key differences between the DGT and the loan trust is that, with the DGT, you are unable to demand the full capital at any time but instead have an entitlement to regular withdrawals which are fixed at the outset.

IHT is a curious tax as its impact for most will only become clear after their death. However, with careful thought and the help of an advisor who is offering the full spectrum of financial planning, there are ways to lessen its impact.

What is a trust?

A trust is a legal arrangement where one or more ‘trustees’ are made legally responsible for holding assets. The assets – such as land, money, buildings, shares or even antiques – are placed in trust for the benefit of one or more ‘beneficiaries’.

The trustees are responsible for managing the trust and carrying out the wishes of the person who has put the assets into trust (the ‘settlor’). The settlor’s wishes for the trust are usually written in their will or set out in a legal document called ‘the trust deed.’

The purpose of a trust
Trusts may be set up for a number of reasons, for example:

  • To control and protect family assets
  • When someone is too young to handle their affairs
  • When someone can’t handle their affairs because they are incapacitated
  • To pass on money or property while you are still alive
  • To pass on money or assets when you die under the terms of your will – known as a ‘will trust’
  • Under the rules of inheritance that apply when someone dies without leaving a valid will (England and Wales only)

There are several types of UK family trust and each type of trust may be taxed differently. Please contact us for details of family trusts and their tax implications.

What is ‘trust property’?

‘Trust property’ is a phrase often used for the assets held in a trust. It can include:

  • Money
  • Investments
  • Land or buildings
  • Other assets, such as paintings, furniture or jewellery – sometimes referred to as ‘chattels’

The cash and investments held in a trust are also called the trust ‘capital’ or ‘fund’. This capital or fund may produce income, such as interest on savings or dividends on shares. The land and buildings may produce rental income. Assets may also be sold producing gains for the trust. The way income is taxed depends on the type of income and the type of trust.

What is a settlor?
A settlor is a person who has put assets into the trust. This is known as ‘settling’ property. Assets are normally put into the trust when it’s created, but they can also be added at a later date. The settlor decides how the assets in the trust and any income received from it should be used. This is usually set out in the trust deed.

In some trusts, the settlor can also benefit from the assets they’ve put in. These types of trust are known as ‘settlor-interested’ trusts and they have their own tax rules.

The role of the trustees
Trustees are the legal owners of the assets held in a trust. Their role is to:

  • Deal with trust assets in line with the trust deed
  • Manage the trust on a day-to-day basis and pay any tax due on the income or chargeable gains of the trust
  • Decide how to invest the trust’s assets and/or how the assets in the trust are to be used – although this must always be in line with the trust deed

The trust can continue even though the trustees might change. However, there must be at least one trustee. Often there will be a minimum of two trustees. One trustee may be a professional familiar with trusts – a lawyer, for example – while the other may be a family member or relative.

What is a beneficiary?
A beneficiary is anyone who benefits from the assets held in the trust. There can be one or more beneficiary, such as a whole family or a defined group of people. Each beneficiary may benefit from the trust in a different way.

For example, a beneficiary may benefit from:

  • the income only – for example, they might get income from letting a house or flat held in a trust
  • the capital only – for example, they might get shares held on trust when they reach a certain age
  • both the income and capital of the trust – for example they might be entitled to the trust income and have a discretionary interest in trust capital

If you’re a beneficiary you may have extra tax to pay or be entitled to claim some back depending on your overall income.

Making a will

The importance of making a will cannot be underestimated, and should also be factored into your estate planning process at the earliest possible stage.  This is explored in more detail on a separate page which you can see by clicking here: Wills.

We specialise in providing independent financial advice for expats, and if you want to protect your family's financial future and minimise inheritance tax talk to us for some impartial advice.  

For further details about how you as an expat may be affected by any aspects of inheritance tax and trusts, contact us today either by phone: +44 (0)1245 216030 or via our Contact Us page.

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