We don’t talk about these things!

I had lunch with a client last week who I will call Jennifer. Her sister Tracey lives in a property owned by an offshore company which is owned by a trust set up by their father Yusef. Yusef is happily married to Sara and they both live in Singapore. Both parents are in their mid-sixties and in good health.

In April Yusef paid £109,050 in ATED which is set to rise again next year. Yusef knows that as from April 2017 if the property in which Tracey lives is still owned by an offshore company he will have to pay another ATED charge and in addition if the company is still owned by the trust will have to pay inheritance tax on the ten yearly charge.

ATED (Annual Tax on Enveloped Dwellings) is the annual charge introduced by the Government to compensate it for the lack of Stamp Duty Land Tax on a sale of the offshore company to someone who wants to own the property. The Treasury has also announced that the rate of tax is due to go up by 50% of the RPI year on year. This a clear indication from the Government that it wants everyone who has a property in the UK to pay tax.

Inheritance tax is payable on death, every ten years by a discretionary trust and on gifts made within seven years of death. As from April 2017 on death it is charged at 40%. If Yusef were to die owning the property or a company which owns a property worth £12 million the tax payable will be £4.8 million. Given that Jennifer and Tracey are his only two children, they would each be deprived of £2.8million if he left the property to them in equal shares.

If he left the property in trust for his children, then he would have to pay tax at 6% on every tenth anniversary of when the trust was set up. Given that Yusef set up the trust in May 2007, the ten yearly charge would £720,000, payable in May 2017 which when added to the April ATED charge of £109,050 adds up to tax in excess of £829,050 next year.

Jennifer accepted her father Yusef needed to enter into an estate plan to save the tax. There is nothing wrong with making a plan to save tax provided it uses reliefs for the purpose for which they were granted.

I sat down with Jennifer last month and we went through the options arriving at a solution which she thought would be attractive to her parents.  

A few days later however she phoned me and by the tone of her voice she was not pleased.

She had met with Tracey her sister who was also delighted with what was proposed, but when they called their parents, their mother Sara refused to discuss any sort of plan. ‘This is an issue for your father and I to discuss and we have not made up our minds as to whom or how we wish to leave this property in London. There are just too many things to consider. We are both in good health and do not want to think about what should happen on our death’.

I suggested that I have a meeting with Sara, I pointed out that Sara need to understand the difference between putting in place an estate plan and a succession plan. 

Jennifer did manage to arrange a meeting. It soon became clear that Sara was not clear as to the distinction between the two. She was worrying as to whetherJennifer or Tracey would have children, what would be their financial circumstance and how much should they provide for each of them and how much should go to charity. She was trying to imagine what her family would look like on the death of herself and her husband, rather than to look at the consequences if either were to die unexpectedly tomorrow.

Once Sara understood the distinction between the two and realised that she could at any time make changes as and when circumstances changed, she quickly grasped the value of the plan and she and her husband asked us to proceed.

If you would like to know more about how to put in place an estate plan, or would like to meet either Caroline or one of her colleagues for succession, offshore trust structuring, dispute resolution or matrimonial issues please contact Svetlana for an appointment on svetlana@garnhamfos.com or call on 0203 740 7423.