How to cut your Inheritance Tax Bill ✂ 💰

Our products over the last few years have assisted many people establish their wealth and build their assets, but does mean further consideration is needed....
Should this worry you??
According to a survey of international millionaires by Swiss bank UBS, the things high-net-worth people are concerned about include:

1. Financial planning
2. Family

If you want to improve your financial plan and benefit your family, I’ll show you a strategy that saved two clients over a million pounds in inheritance tax, and enabled them to make tax-free gifts to benefit their children and grandchildren.

This strategy could work for you if:

You’re a British expat who’s created significant wealth
You want to protect your worldwide estate from excess taxation
You want to ensure your family is protected and well provided for

How to cut your Inheritance Tax Bill

Inheritance tax (IHT) is the most unfair tax. It’s one of the few things nearly all Britons agree on! In the tax year to April 2016, the British taxman took £4.66bn in IHT revenue. By 2021, that figure is predicted to rise to £5.7bn.

The best way to avoid IHT is to die with too few assets to have to pay it.
But, assuming you don’t want to give away everything you’ve worked so hard for, the next best thing is to cut your liability as much as you can.
And that was precisely why Mr. and Mrs. Smith* contacted Succes Investment Group last year, to cut their future IHT liability.
(*For the purposes of client confidentiality, I have changed names.)

Case Study Background

Britons Mr. and Mrs. Smith were residents in the UAE, with assets in excess of £8m.

Because they were intending to spend more time in the UK with family, they wanted to mitigate any potential liability for the various forms of UK taxation, particularly IHT.
The majority of their wealth was split between real estate, stocks and bonds.
Without adjusting their financial plan, Mr. and Mrs. Smith were about to become liable for over £80,000 in annual income tax in the UK. They would also have a significant capital gains tax liability in the near-term, as they intended to sell international assets after becoming UK tax resident.
Additionally, if the unthinkable were to happen and both Mr. and Mrs. Smith were to die immediately, the IHT liability would be well over £3million.

Assumptions

We identified that Mr. and Mrs. Smith were going to become UK residents for tax purposes, based on the number of days they intended to spend in the UK, and various ties, including the accommodation tie. As UK tax-residents, they would be liable to UK income tax, capital gains tax and IHT on their worldwide assets.
We identified they had a balanced attitude to risk investments. And for IHT purposes, we assumed that on first death, Mr. or Mrs Smith would gift all assets to the other, and therefore based our calculations on their joint estate and a total Nil Rate Band of £650,000.

Income and capital gains taxes

As the article’s title suggests, this is a case study to demonstrate how you can reduce or remove your own IHT liability. However, it’s worth noting that within the overall strategy we created for Mr. and Mrs. Smith, we were able to remove their entire income and capital gains tax liabilities as well.

Inheritance tax facts

In an earlier article I explained UK inheritance Tax rules for Expats.; the only thing I’d like to add to that article here, is that there is a tapered withdrawal of the new additional nil rate band (NRB) for estates with a net value of more than £2m. This is at a withdrawal rate of £1 for every £2 over this threshold. Because of this, clients Mr. and Mrs. Smith were not going to benefit from this additional NRB due to the value of their estate.

**3 ways to cut your inheritance tax bill**

In order to mitigate the IHT liability which applied to their estate, there were various strategies that Mr. and Mrs. Smith could implement, which could also apply to you.

Broadly they included:

Lifetime gifting and exemptions  
Use of trusts  
Family assurance policies

How we saved our clients £1million in inheritance tax

For our clients, the use of a loan trust to mitigate IHT and sustain their desired income requirements was appropriate. The use of a loan trust with an underlying offshore bond would help mitigate their IHT liability, as well as allowing them to take a tax-efficient income from the underlying offshore bond, using the 5% tax-deferred withdrawals allowance each year.

Loaning some of their assets now into such a trust arrangement would mitigate their future liability to IHT.

After undertaking a lifetime cashflow modelling exercise with them, we estimated that Mr. and Mrs. Smith’s IHT liability would be reduced by over £1million just 7 years after setting up this structure. We assumed they would keep their cash holdings, UK main residence, UK rental property and one international property, but sell their remaining holdings into an underlying offshore bond within a loan trust arrangement before becoming UK tax resident.
This would equate to the underlying Offshore Bondholding circa £4million of assets, meaning Mr. and Mrs. Smith could withdraw up to £200,000 per annum in total for 20 years with no immediate liability to UK income tax. This money was essential for them to fund their expenditure requirements in Retirement.

This would save them over £80,000 per annum in income tax.

As the underlying offshore bond would be in a loan trust structure, the growth on the £4million would be immediately outside of their estates for IHT purposes as well. This solution therefore eradicated their annual joint £80,000 income tax liability and reduced the value of their estate for IHT purposes.
In addition, the flexibility of the loan trust arrangement meant they would not lose control of their capital, as they would with other trust arrangements.

We also recommended making IHT exempt gifts out of their normal expenditure to benefit their family, and that they also considered life assurance to mitigate their remaining liability to IHT.

Conclusion

For you, the above is purely indicative, but it serves to illustrate the potential tax savings which can be made with effective planning. If you want to mitigate your IHT liability, it’s never too early to start planning.

How to cut your Inheritance Tax Bill ✂ 💰