Those of you who read this column regularly will know that it is very difficult to shake a UK domici...
Those of you who read this column regularly will know that it is very difficult to shake a UK domicile of origin unless you are very sure that your intention is to remain in your new country of residence on a permanent basis. This may be easier to prove if you live in a jurisdiction that UK nationals have traditionally emigrated to, for example, Australia, New Zealand, Canada or the USA. However, it isn't easy to prove this intention to remain permanently in other traditional 'expat' jurisdictions, such as Hong Kong or the Middle East.
Although people may stay in these jurisdictions for a whole working career, in most instances the individual will not, or even cannot, remain there after they stop working. This means that they will still be subject to UK inheritance tax (IHT), a fact proven by the case of Engineer vs IRC, where the taxpayer was still subject to UK IHT even though he had lived in Hong Kong for over 30 years.
It is well known that there are ways of avoiding IHT through lump sum planning, usually involving a gift that falls outside the estate after seven years. However, not all clients will fit the profile of a typical user of these plans, expatriates in particularly, who tend to be younger, and thus cannot afford to give away access to capital in a long-term arrangement such as a Discounted Gift Trust.
So what alternatives are available for these clients? An obvious one would be to take out a protection plan such as a term or whole life policy that will pay out the proceeds tax free, which can then be used to pay the liability. It is important that these plans are written under trust, or else the sum assured will form part of the client's estate, thus increasing the IHT bill. A beneficiary nomination will not work as these are generally revocable, which means the policy will still form part of the client's estate.
Another, often overlooked, option is to use the "regular gifts out of income" exemption. This exemption provides the opportunity to gift away unlimited amounts of money that will be immediately outside your estate for IHT - in other words you do not have to wait for seven years to pass before the money is free of IHT.
There are certain conditions for the exemption to be available:
• The gift is made as part of the donor's 'normal expenditure'
• It is made out of the donor's income
• The donor is left with sufficient income to maintain his usual standard of living
"Income" generally means recurrent income, such as salary, and the "usual" standard of living will be particular to each individual rather than based on what may be generically perceived as an acceptable standard. The term "usual expenditure" is interpreted as some form of 'settled pattern', and it is up to the taxpayer to keep a record or account of the pattern in some way as proof.
The opportunity for advisers is that there is no better way to establish a regular pattern than to effect a regular savings plan written in trust. In fact, the HM Revenue & Customs guidance on the exemption specifically mentions regular premiums to an insurance policy as an example of what they consider to be proof of a regular pattern.
The advantage to the client is that he can potentially build up large amounts of capital from surplus earnings in a fund that is totally free of IHT. The flexible trust that sits around the policy gives flexibility to use the money for a variety of purposes, for example for school fees, a deposit on a property for children, or indeed even to pay the IHT liability if protection proceeds are insufficient to meet the liability. The client can also change the beneficiaries, for example, he may wish to skip a generation and provide for grandchildren.
This type of plan may be the ideal solution for expatriate clients who feel they have time on their side and do not wish to tie up capital in lump sum arrangements, or for those who are income rich but capital poor at present.
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