Author: Helena Luckhurst
This article was published in Prime Resi on 31 October 2017 and is reproduced here with kind permission.
No doubt you’ve read the press reports about the sixth Duke of Westminster who has arranged his financial affairs so that the bulk of his £9bn property portfolio passes to his son, Hugh, without having to pay much in the way of death duties.
So have you ever wondered how the very wealthy seem to pay little or no Inheritance Tax (IHT)?
As someone who advises clients about their IHT planning regularly, I know that statement is rarely true but it is what a lot of people think. So how do the rich do it?
Allow me to let you into a secret – you can do the same too. You’ve just got to plan ahead – well ahead.
If you get past the brash headlines about the Duke’s estate, you’ll start to see references to family trusts. Not much of the Duke’s billions actually passed from father to son on his death, via his Will. The Duke left the £600m of assets that he personally owned to his wife, Natalia, via his Will. And for UK domiciled spouses (and civil partners) at least, a 100% IHT spouse exemption usually applies when a spouse leaves assets to his or her widow(er). So no IHT on that occasion but the £600m could be liable to IHT on her death, unless she passes it to another (new) spouse! Instead, the bulk of the Duke’s family wealth is held in trust, and a particular kind of trust which meant that the trust assets were not taxed to 40% IHT on the Duke’s death.
Hold on before you rush to put your property portfolio into trust, though. A change took place in 2006 which means that if an individual tries to put more than £325,000 into trust these days, the excess above the individual’s available nil rate band (which may be less than the maximum £325,000, depending on previous gifting history) is immediately taxed to 20% IHT. What’s more, if you continue to get some benefit from the trust, or name yourself as a potential beneficiary, the planning might not work for IHT. Giving assets into trust can also trigger Capital Gains Tax, although it might be possible to defer that tax bill. In short, be careful and get tax advice first before you do anything.
How did the Duke get his property portfolio into trust then? Well, the tax rules for getting assets into trust in lifetime were more relaxed prior to 2006 but chances are, it wasn’t the Duke who added the assets into the family trust – it was his father or grandfather.
These days, from a tax perspective, it’s often easier to get assets into trust after death. For example, rather than leaving your property portfolio to your children outright on death, your Will could provide for it to pass into trust for your children and remoter descendants instead. It won’t improve the IHT position of your estate on death but it will make a great difference for your children’s IHT planning because the property portfolio can pass free of IHT to your grandchildren when your children pass away. And maybe then your children will put their own assets into trust via their Will, and so it goes on. Trusts can last for up to 125 years by law, so that means that family wealth can be sheltered from IHT for at least three generations. That’s three generations of 40% IHT saved – a lot of tax potentially.
It’s important to know that trusts (even the Duke of Westminster’s) do pay IHT from time to time, most notably on each tenth anniversary following their creation, but only a maximum of 6% IHT is payable on these tenth anniversaries. As long as you know the tax bill is coming, though, you can plan for it – perhaps setting aside some rental income to pay it each year. Trusts also cost money to run, as invariably you will need professional advice. Trustees have to complete tax returns and now they have to report beneficial ownership information. So are they right for you? That’s where you need a professional to run a cost benefit analysis for you, to see if the figures stack up, but it need not cost the earth to run a trust.
So, using family trusts to save IHT is not just for the super rich. However, because trusts are not familiar to a lot of people, they are under-appreciated. IHT planning with trusts won’t appeal if you are looking for instant results either, as the fruits of planning done now might well only be enjoyed by future generations many years later. But if you want to follow in the Duke’s footsteps with your IHT planning, it’s what you’ve got to do.
Helena Luckhurst, Partner, Fladgate LLP (firstname.lastname@example.org)