Understanding Our Clients' Situation To Provide Helpful Advice
Mr Client and Mrs Client are married with three adult children, of whom two are employed and one is at university.
Mr Client settled funds into an offshore trust in 1996, now valued at around £37m. The beneficiaries of this trust are Mr Client, Mrs Client, their children and future generations. Underneath the trust there are four limited companies, which hold a mixture of UK property and investment funds. Over the years Mr Client has received loans from the trust and has used these funds to purchase property and investments in Singapore, Thailand and in Switzerland.
Mr Client and Mrs Client have a family home in the UK, valued at £2.5m. They have also established a large family home in India, where Mrs Client's parents now live (permanently). Mr Client and Mrs Client wish to retire to their home in India in the next 10 years but would like to see their children settled first. They expect that the children will remain UK resident.
Mrs Client has cash held in a variety of building societies of £500,000. They have calculated that their UK expenditure is £200,000 net per annum. Mr Client and Mrs Client have each written wills in both the UK and India. Mr Client has received legal and tax advice with regards to the implications of the recent changes to the UK ‘Non Domiciled’ regime. He is currently relying on the UK/ Indian double tax treaty in order for his assets in the offshore trust to remain out of the scope of UK Inheritance Tax (IHT). He has been advised to remain non-UK resident for six full tax years. In doing so he will break his UK ‘deemed domicile’ status and, while non-resident, he will break his existing trust and resettle the funds into a further offshore trust. Mr Client has taken up employment with one of his property companies in Singapore, which develops residential and office buildings in Singapore and Malaysia. He has been advised as to how many days, per tax year, he may reside in the UK and is happy to comply with this. He and his wife have always spent a great deal of time with family in India and also in the US. His children fly to join them for holidays outside of the UK.
To consider the most efficient options for creating the necessary ‘clean’ capital to meet their UK expenditure.
To consider their UK IHT liability and how this may be mitigated. As part of this, to consider what assets might be gifted to their children. They do not want to ‘spoil’ them or take away their drive but would like, for example, to help them get onto the property market.
They have historically kept the details of their wealth away from their children but they now believe that the children are old enough to have a greater involvement. They are looking for support in the financial education of their children and would like them to take on some responsibility for managing at least some aspects of the family finances.
Alongside their tax advisor, to review the investments held within the trust and advise on any changes. They have particular concerns about holding the UK properties within the trust. They would like the entire property portfolio to be reviewed, from the perspective of the UK non-domiciled rules.
We have been instructed to perform an ‘oversight’ role in both investment and wealth planning. Mr Client receives specific advice on individual aspects of his wealth but has become aware that until now no one has considered matters holistically.
Property review. Together with his tax advisor we have reviewed the UK property portfolio. Our Real Estate team made recommendations about which properties to retain and which to sell, from an investment perspective. The tax advisor established the most efficient vehicle in which to hold the properties to be retained, and the best channel of disposal for those to be sold or gifted. This review has resulted in a number of properties passing out of the trust into Mrs Client’s direct ownership. These properties have no mortgages and Mrs Client is able to use the rental income from them to meet £75,000 of UK expenditure.
Further properties have been passed to the children (2 each) to be held in their names. Their daughter is selling one of these and will use the proceeds to buy a property in Edinburgh, where she is at university. She is going to purchase a property that will enable her to rent out spare rooms to other students. She is in year 2 of an architecture degree and she intends to be in Edinburgh for at least the next 5 years. She will use the rental income from the other students to meet her own university expenditure. This has reduced the family expenditure by £15,000. The rent is expected to fall predominantly within her personal allowance and so will incur minimal tax.
Education of the children. Family governance meetings have been held to inform the children of the details of their family wealth and to provide a forum to answer all of their questions. It has been agreed that each child will undertake the management of the residential properties that they have been gifted as part of the property review. We have supported them in this and have guided them as to what this responsibility will entail, including the need to keep proper records of rental income and of the costs of managing and maintaining the properties. Bi-annual meetings have been scheduled with each child to review the processes that have been put in place.
UK Pension. Mr Client has £1.35m held in a SIPP, with ‘Fixed Protection’ from 2012. We have revised his expression of wishes for this SIPP and he has now stated that his 3 children are equal beneficiaries of this fund. Davina does not believe she will ever need these funds.
Cleansing and rebasing of overseas assets held as at 05/04/2017. On the advice of Arnav’s tax advisor, we have obtained valuations as at 05/04/2017 for his pertinent overseas assets. This will allow Arnav to ‘re-base’ the cost-prices of these assets under the new rules should he wish in the future. The tax advisor has undertaken a ‘cleansing’ exercise in the overseas portfolio, in the process identifying £1.5m in ‘clean’ capital which has been segregated into a separate account. This is being retained in cash at present. Following a detailed review of the operation and origin of their overseas accounts, we have been able to rationalise these accounts and reduce them in number. We have clarified which of these accounts require the continuing segregation of income and gains, and which do not. Historically there has been no clear strategy for these accounts, nor how they should be operated.
Loans paid out to Mr Client from the trust. Mr Client is looking to repay the loans he has received from the trust over the next few years, before he resettles the trust. He has a number of property developments in Singapore and Malaysia which are coming to conclusion and rather than reinvesting the profits into further ventures, he will use part of these funds to repay his debts to the trust.
Enterprise Investment Scheme investment (EIS) utilising Business Investment Relief (BIR). Mr Client receives rental income from a number of UK properties he holds in his personal name. We used BIR in order to bring into the UK offshore ‘tainted’ funds to invest in EIS opportunities. Mr Client has brought £200,000 of tainted capital into the UK (without penalty, under BIR) and has been able to reclaim £60,000 of income tax against his UK income tax liability for the 2018/19 tax year (through EIS). Despite being ‘sited’ in the UK, the EIS investments are expected to be IHT free after two years of ownership. The initial capital invested must be returned offshore within 45 days of the investment being realised but all gains (and the tax relief received) are tax free and ‘clean’ and maybe retained in the UK. This strategy will help to maintain a fund of clean capital. We are investing a further £50,000 in Mrs Client’s name from her cash holdings to enable her to reclaim £15,000 of income tax relief against her UK rental income. We expect to invest in this way on an annual rolling programme.
Offshore Whole of Life policy. While at present the offshore trust would be expected to remove significant value from any UK IHT exposure, we have recommended that an offshore ‘whole of life’ policy is established. This is written on joint lives to be payable on second death. The policy has been set up with an offshore insurer and is held in trust to ensure it remains out of either of their estates. The premiums are able to be paid from offshore funds. The policy has been set up with a £20m sum assured and is ‘portable’, meaning that it can move with Mr & Mrs Client as and when they change their residency.
Wills and Power of Attorney (POA). Mr & Mrs Client have undertaken a full review of both their UK and Indian wills in the light of the changes they are making. They have also established power of attorney for their affairs.
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