For a start, let me explain that this particular piece is
mainly aimed at Brits; however, it will also be of use to those of you whose law
is based on the premise of the English legal system.
There are many UK non-residents who are still UK domiciled.
These people either live or work overseas at the moment but are still
considering a return to the homeland sometime in the future.
There is a good chance that they still have assets in the UK,
especially a property, and despite the fact they live overseas still maintain
close links with the UK whilst they are away.
This means that, irrelevant of all else, Her Majesty’s
Revenue & Customs (HRMC) will still regard these people to be UK domiciles. In
turn, this ‘qualifies’ them to be subject to UK Inheritance Tax (IHT) on their
worldwide (the emphasis is intentional) assets.
There are several ways to counter this. However, in this
article we will look at how to combine Life Assurance with a simple Trust which
is NOT expensive.
I am the first to admit, that for those people who have
worked hard all their lives the last thing they probably want to talk about is
insuring their estate for someone else’s benefit. However, the fact is that it
is very wise to do so. If all the right plans have been put in place then your
heirs will avoid a lot of potential financial hardship and the emotional side of
things will be easier to endure as well.
In the UK, the IHT threshold is presently at GBP325,000. It
is not expected to increase at any time in the near future. Thus, whilst the
value of your personal assets may well increase in the next few years, the
ability of offset any rise in the price of your property will not. The result of
this, unless proper protection is in place, is that your beneficiaries will not
get what you wanted them to receive. Therefore, unless other measures have been
taken, an easy and efficient way to get round this is to ensure protection via
Life Assurance is in play.
Let’s look at how this can work. Take Fred who is fifty and
lives and works in Thailand. For some strange reason when he retires at 65 he
has decided that they UK is the place to be. His total portfolio, including his
home, is worth GBP525,000. This obviously means that he is GBP200,000 over the
threshold value and so forty percent of this will be liable to IHT or, to put it
another way, the government will get GBP80,000 of Fred’s money for doing
nothing.
This is bad enough, but even if we only assume a five percent
growth per annum on Fred’s worth until he retires then the value of his taxable
estate could have become as much as GBP1.1 million. Suddenly, the GBP80,000 has
grown into a liability of over GBP300,000.
After taking advice, Fred decides to take out cover to the
tune of GBP350,000 which should be enough to cover any IHT liability should he
die before he retires (there are two ways of doing this, either via Level Term
or Whole of Life. The former is usually the cheaper option).
On top of this, Fred has realized that the Life cover will be
construed by HMRC as an asset of his estate which will thus increase his IHT
liabilities even more. Having understood the implications of this Fred also took
out a trust.
The reason for this is that IHT law in the UK can be quite a
pain. Potential beneficiaries have to obtain probate before they can legally
deal with the Life company which has supplied the cover. This may not look like
a real problem but it should be remembered that the beneficiaries need to put in
an IHT account to HMRC and tax must be paid. This is a Catch 22 situation. Those
that are meant to receive what you want them to cannot then get hold of it as
they have not been able to provide any documentation which shows they are
legally allowed to access to what is rightfully theirs.
This means that, potentially, some of Fred’s assets could
have to be sold to provide HMRC with the money to cover the IHT liability.
Fortunately, as indicated above, Fred had the foresight to
realize this. By placing the policy in a trust the value of the Life Assurance
could not be included in the total value of his assets. Moreover, the trustees
of the policy are the legal owners and so would have all the right paperwork to
hand so could obtain an immediate payout. This would then result in Fred’s
beneficiaries getting what was rightfully theirs quickly, efficiently and with
no stress.
Doing the above does not take long, it makes things a whole
lot easier for those who survive you and you know that those you wanted to
benefit actually do so.
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The above data and research was compiled from sources
believed to be reliable. However, neither MBMG International Ltd nor its
officers can accept any liability for any errors or omissions in the
above article nor bear any responsibility for any losses achieved as a
result of any actions taken or not taken as a consequence of reading the
above article. For more information please contact Graham Macdonald on
[email protected] |
