Buying homes in the UK and in particular London, has been part of the diversification investment strategy for wealthy Asians for the last three decades. Having a home in the UK, is their offshore ‘store of value’. Until recently not only was it a good investment which enriched their lives, but was also tax free.
Families could simply invest through an offshore company and then forget about stamp duty, capital gains tax and inheritance tax. This has now all changed thanks to George Osborne.
Many foreign home owners are confused. They need to know that just as it was possible to avoid taxes through foreign company ownership there are other ways in which tax can be mitigated.
Lee is a typical Asian living in Singapore, he has a daughter in Wycomb Abbey and a son at Cambridge University. He owns a home in Knightsbridge where he and his children stay when in the country and not at school or uni. Their home is owned through a Jersey trust and company structure, on which Lee has been paying the annual tax on enveloped dwellings which for last year was £54,450. Their children are resident in the UK and are beneficiaries of a trust which is also based in Jersey. The cost of running two trusts offshore is in excess of £16,000.
Lee’s first priority are the taxes on his home; the annual payment of ATED, capital gains tax on a sale at 20% and ultimately inheritance tax at 40% on death, the second priority is that he and his wife do not want to give large sums of money to their children at such a young age.
Oddly enough tax planning should be first and foremost about life decisions – not tax. Living in the Bahamas may be a great way to save taxes, but if you do not want to live there – don’t do it! This means that planning around personal priorities should not be embarked upon by an enthusiastic amateur.
To take Lee’s Knightsbridge home out of the company structure would, I pointed out, trigger a capital gains tax charge. However, it would be levied only on any gain made since 2015 and at a rate of 20%. So this would not too onerous a cost.
Lee and his wife would then need to put in place some precautionary measures to mitigate inheritance tax. They are both in their fifties and in good health, so what they needed was precautionary measures should Lee die unexpectedly – not a full blown succession plan.
For Lee it made sense for him to draw up a Will leaving his Knightsbridge home in a Will Trust for his wife for life and thereafter for their children. Given that both she and Lee are non UK domiciled, this transfer would be tax exempt. Lee’s wife could then decide whether to keep or sell the home. If she decided to sell it, she could then take the proceeds out of the UK and the value would then immediately be outside the scope of Inheritance Tax on her subsequent death or gift to the children.
With regard to the trust for the children, I asked whether the children were paying UK tax on the income and capital gains tax on the distributions which they were receiving from their Jersey trust. They were, but at their lower rates of tax, so the annual tax cost was not very high. The main benefit of the trust was therefore to provide a hedge against the ten yearly inheritance tax charge at 6%.
I pointed out that if mitigation was the main benefit of the trust then there was no reason to keep it offshore. The same benefits could be achieved if the trust was repatriated to the UK by appointing UK trustees.
Lee was delighted putting in place a few simple precautionary measures which did not take him long to understood, he felt much more in control, he could retain his UK investments and continue to enjoy them.
Tax should never be the tail which wags the dog. People like Lee can always find ways to mitigate tax, and because the timing of death is not predictable estate planning is not considered by the government as aggressive tax avoidance.
If you would like to book an appointment with Caroline who is a Fellow of the Chartered Institute of Taxation or meet with any of her team for dispute resolution, matrimonial or family business concerns contact firstname.lastname@example.org or call 020 3740 742.