1st Edition, January 2017
You're receiving this newsletter because you are registered with VFS International.
Having trouble reading this email? View it in your browser.
Not interested anymore? Unsubscribe instantly.
VFS INSIGHTS



VFS will be publishing a series of articles called VFS Insights, raising awareness of issues which may have a significant impact on your financial affairs and your estate, either in your lifetime or in the future. VFS Insights will cover the latest and most important changes in the rules and regulations governing financial planning and what they mean for you and your family. They will also cover existing risks and the measures that can be taken to mitigate their impact on your estate.

The focus of the opening articles in our series is estate planning and inheritance tax. Many people, including non-domiciled, non-UK residents or nationals and anyone owning residential property in the UK, may be more exposed to inheritance tax than they realise.

INHERITANCE TAX: HOW PREPARED ARE YOU?

Inheritance tax (IHT) is no longer just a worry for the super wealthy. With governments around the world seeking to increase tax revenues from non-domiciles, more families are at risk than ever before. Now is a good time to assess your liability and consider your options. Planning ahead may help protect your estate in the future.


NEW RULES PUT UK PROPERTY OWNED BY NON-DOMS VIA OFFSHORE COMPANIES AT RISK OF INHERITANCE TAX

On 6 April 2017, the UK intends to introduce new tax rules further curtailing the use of offshore companies by non-domiciles for UK property ownership by making these homes liable for UK IHT. The impact of the new rules will be felt by a significant number of people, not just because they target enveloped dwellings but also because they include lower value properties and homes which are let out.
Despite the introduction of the Annual Tax on Enveloped Dwellings by the UK government in 2013, many non-domiciles have continued to use offshore companies to shelter property in the UK from IHT. Property enveloped in these structures is currently exempt from UK IHT because when that property is gifted or transferred on the death of the beneficial owner, it is actually the shares in the company (which are non-UK situs) that are transferred and not the property itself. Without the offshore company, IHT would be levied at 40% on the value of the property above the nil rate band (NRB), which is currently set at £325,000.

From the spring of next year, all this will change. Under the new proposals, residential properties in the UK that form part or all of the value of an overseas corporate structure will no longer be excluded from UK IHT. Furthermore, unlike ATED, there will be no minimum value threshold and no exemption for property that is let out, putting many more families at risk. In most cases, inheritance tax will fall due on the death of a company shareholder.

So what about trusts? Until now trusts have offered non-domiciles an effective means of sheltering UK property from IHT - if that property is held in an offshore company whose shares are in turn held by trustees. However, the new rules, if implemented, will see trusts deployed in this way immediately lose their appeal too. The draft legislation includes proposals to charge IHT when shares in that offshore company are transferred into a trust, on the death of the settlor within seven years of the trust's creation, on the tenth anniversary of the trust, on the death of the settlor if he or she is a beneficiary of the trust and if the interest in the UK property is distributed from the trust. So while trusts and offshore companies remain effective in reducing inheritance tax on assets held outside the UK, as a means of mitigating inheritance tax on dwellings in the UK, they have had their day.

Optimists point out that, since there is no current requirement to disclose the underlying beneficial ownership of an offshore company owning property in the UK, the new rules are unenforceable. However, a thorough read of the draft legislation makes this scenario highly unlikely. It reveals that the UK is seriously looking at making it impossible to sell an indirectly owned UK residential property without notifying HMRC and settling any IHT liability. In addition, in line with the Common Reporting Standard to which the UK has signed up, the government is also considering making it obligatory for overseas companies wishing to purchase property in England and Wales to disclose the beneficial owners. The almost 100,000 overseas companies already owning UK property are likely to have to register beneficial ownership too.

So what should non-domiciles with interests in UK property do? There are two different potential courses of action. Which one you choose will depend on your age. Either way, there is now a strong case to remove property from structures previously used to provide shelter from IHT. So called "de-enveloping" means that the property will be owned directly.

So one option is to give your UK situs property to your children in your lifetime and, provided you live for seven years after the gift, they will not have to pay any IHT on it. However, their children will have to pay IHT - unless further protection is put in place.

Option two is to pay up and buy a whole of life insurance policy whose benefits can be used to cover the IHT bill. A life insurance policy can often be a cheaper and simpler strategy. Insurance protection is also likely to escape the anti-avoidance agenda being pursued in the UK and in many other jurisdictions.

For those that aren't insurable or who want to save their grandchildren from having to pay up, life policies can be gifted to children, if they are old enough. As long as you place the whole of life policy in an offshore trust, it will not form part of your children's estate. This way the life insurance will not be subject to probate delays and will be immediately available to pay any inheritance tax. So adopting this strategy ensures that your property will be transferred on to the next generation without a forced sale to pay the tax bill.

Some of these solutions are relatively simple and cost effective. Put in place at the right time, these and other measures could significantly reduce the impact of inheritance tax on your legacy. Seeking expert financial advice is essential in order to avoid putting your estate unnecessarily at risk. To assess your liability and discuss the options available, please contact your VFS advisor.

 


Disclaimer
Information throughout this newsletter, whether stock quotes, charts, articles, or any other statement or statements regarding market or other financial information, is obtained from sources which we, and our suppliers believe reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. Nothing in this newsletter should be interpreted to state or imply that past results are an indication of future performance. There are no warranties, expressed or implied, as to accuracy, completeness of results obtained from any information contained within this newsletter or any linked websites.Unless expressly stated otherwise the information in this newsletter relating to products and services does not constitute an offer, or inducement to enter into a legally binding contract, and does not form part of the terms and conditions for such products and services. Furthermore, the information provided is not intended to be taken as financial advice and does not take into account any investor's individual requirements and circumstances. Products and services listed here may not have been registered or authorised by any central bank, governmental or regulatory authority in the country of your residence. Accordingly, you may not have the benefit of protection from the securities laws, banking laws and other relevant laws and regulations of your country of residence with respect to products or services referred to on, or through this newsletter.

Share

Send this email
Quick contacts

Follow this link >

© Copyright VFS International All rights reserved.