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HMRC crackdown: how to protect your offshore assets

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Written by:
23/10/2013
If you hold assets offshore, a crackdown on tax evaders who use overseas havens to hide money could leave your loved ones open to the risk of receiving an unexpected tax bill on your death.

While money sheltered overseas has always been subject to inheritance tax (IHT), new HM Revenue and Customs (HMRC) disclosure requirements mean hundreds of millions of pounds will now become visible to the taxman and completely open to scrutiny for IHT purposes.

However, there are certain tax planning measures you can implement to protect your beneficiaries and make your assets tax efficient and easier to manage once they have been disclosed.

Here, Steve Lawless, global head of banking distribution at Skandia, offers his advice:

“By structuring the disclosed overseas assets into an offshore bond, investors can gain control over the timing and nature of any events that are subject to tax. All taxes are deferred within the structure (except for any withholding taxes) and only on an encashment would a tax situation arise.

“Once these assets become more efficient to manage, the next step is for the investor to mitigate any tax exposure and to protect the assets for their beneficiaries.

“UK IHT is set at a substantial flat rate of 40%. Although investors do have an IHT allowance of £325,000, this allowance is currently fixed until 2019, so will decline in real terms. For many this level is already insufficient to cover their main home, let alone other investments. Placing the offshore bond into a trust can help reduce this IHT liability, therefore helping protect the investor’s wealth.

“Trusts are not just a legitimate way of mitigating tax, they have many other benefits. These include ensuring the right people get the right proportion of assets at the right time. They help provide ways to navigate complex family situations, as well as assuring that funds are available without the delay of probate.

See the box below for examples of trusts

“When putting the assets into trust, an investor should also consider who they appoint as trustee. The role of trustee carries with it significant responsibilities, though it often lands upon friends and family to fulfil. Investors could consider delegating the administrative and legal burden of running a trust to a professional.

“Using an independent corporate trustee when setting up a trust can help ensure trustee duties are followed and on-going consideration of the beneficiaries needs is taken. These duties include reviewing documents, maintaining trust records, filing the appropriate tax return and undertaking yearly trust and asset reviews.

“A corporate trustee will handle the complex task of calculating the tax liability and can add real value to the management of the trust. This will offer investors great comfort and reassurance that the trust is being administered appropriately.

“It is important that investors with overseas assets that have either already been disclosed, or are yet to be disclosed seek professional advice. A financial adviser will be able to restructure the assets accordingly, easing the reporting burden for the investor. If the assets are then placed into a trust, this will help to mitigate any IHT liability. With the IHT tax rate set at 40%, through some careful financial planning, an investor could stand to save thousands.”

 

 

A loan trust:
The loan trust is a vehicle which allows the investor (lender/ settlor) to loan money to the trust. This means they retain access to the loan amount (their capital sum), whilst giving away entitlement to any growth. The IHT liability on the capital sum is essentially frozen, and any growth on the assets will immediately be outside the settlor’s estate.

 

A discounted gift trust:
The discounted gift trust is a scheme which gives the investor (settlor) the ability to make a gift into a trust, whilst retaining a right to withdrawals (an income). The level of income the settlor is likely to receive is valued for IHT purposes and this amount is immediately outside of the settlor’s estate and therefore not subject to IHT. The remaining amount of the gift is either subject to IHT as a chargeable lifetime transfer or a potentially exempt transfer. Either way, after 7 years, provided the settlor is still alive, the whole amount falls outside of the estate and is free of IHT.

 

 

 

 

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