Death is cer­tain - but in­her­i­tance tax can be avoided

Financial Mirror (Cyprus) - - COMMENT - By Michael Do­herty

Noth­ing is cer­tain ex­cept death and taxes, wrote Ben­jamin Franklin in 1789. Some claim the great man pinched the line from Daniel De­foe who said some­thing very sim­i­lar in a book writ­ten 60 years ear­lier.

But whoever came up with it, there is no dis­put­ing the ac­cu­racy of the maxim. It is just as true to­day as it was in the eigh­teenth cen­tury, but nowa­days the tax au­thor­i­ties will try to take a slice from your es­tate even after you have died.

If you are a Bri­tish cit­i­zen, don’t be lulled into a false sense of se­cu­rity by your res­i­dency in Cyprus. It is a com­mon mis­con­cep­tion among Bri­tish ex­pats that their li­a­bil­ity to UK tax ends as soon as they be­come a tax res­i­dent else­where. Un­for­tu­nately, that is rarely the case – the es­tate of­ten re­mains li­able to UK in­her­i­tance tax (IHT).

The UK tax au­thor­ity (HMRC) cat­e­gorises in­di­vid­u­als by res­i­dency and domi­cile. Con­fu­sion over these terms cre­ates false se­cu­rity. Peo­ple as­sume, not un­rea­son­ably, that they mean the same thing. Not to the tax­man, they don’t. Un­less you ac­tively change it, your domi­cile is the coun­try where you were born. Res­i­dency is the coun­try where you spend most of your time.

It is easy to be­come tax res­i­dent in an­other coun­try, and there­fore to be­come a UK non-res­i­dent. But it is ex­tremely dif­fi­cult to lose your UK domi­cile. If an ex­pat has any ties with the UK (no mat­ter how ten­u­ous – emo­tional or fi­nan­cial), it will nor­mally be enough for HMRC to ar­gue that they re­main UK-domi­ciled for tax pur­poses.

So, although you are classed as non-res­i­dent in the UK for tax pur­poses, your fam­ily will still be li­able for UK in­her­i­tance tax of 40% on the value of your es­tate that ex­ceeds the HMRC thresh­old.

The thresh­old stands at GBP 325,000 (a lit­tle more if the es­tate in­cludes your home) or GBP 650,000 for mar­ried cou­ples and civil part­ners. So, un­less steps are taken, the ben­e­fi­cia­ries of an un­mar­ried ex­pat’s es­tate worth GBP 3 mln will be faced with a Bri­tish tax bill of around GBP 1 mln. How­ever, with care­ful plan­ning, and in­de­pen­dent ad­vice, it is pos­si­ble to legally avoid a sig­nif­i­cant amount of UK in­her­i­tance tax.

One way is to change your coun­try of domi­cile, but this is not easy. It in­volves much more than sim­ply show­ing that you now live abroad. You also have to show that you have no in­ten­tion of re­turn­ing to the UK. This will mean, at very least, re­lin­quish­ing your UK pass­port, clos­ing all UK bank ac­counts, sell­ing any prop­erty owned in Bri­tain and buy­ing prop­erty in Cyprus.

Even if you do all this, the tax­man may de­cide against you. There are, how­ever, a num­ber of tax ef­fi­cient fi­nan­cial struc­tures by which you can not only avoid in­her­i­tance tax but also in­crease the fi­nal value of your es­tate.

A dis­counted gift trust is a way of ef­fec­tively ‘gift­ing’ money to a ben­e­fi­ciary while re­tain­ing con­trol of the money un­til death. Trans­fer­ring your pen­sion pot can also help you avoid in­her­i­tance tax or, at least, re­duce the bill.

The pro­cesses are worth­while but com­plex. You should al­ways seek ad­vice from an in­de­pen­dent fi­nan­cial ad­viser who will be able to talk you through your op­tions.

The Wood­brook Group is an in­ter­na­tional firm of fi­nan­cial ad­vis­ers. We are not owned by any fi­nan­cial in­sti­tu­tion or life in­sur­ance com­pany and can of­fer you un­bi­ased and im­par­tial ad­vice.

Our ap­proach to com­pre­hen­sive fi­nan­cial plan­ning and in­vest­ment con­sul­tancy ser­vices for high-net-worth in­di­vid­u­als helps en­sure our clients’ wealth is pre­served, pro­tected, and max­imised tax-ef­fi­ciently. We can help you and your fam­ily pre­pare fi­nan­cially for the ex­pe­ri­ences and chal­lenges of life.

And that also means pre­par­ing for what hap­pens after a death. No­body likes to think about it, but it does need to be planned for.

Michael Do­herty is CEO of the Wood­brook Group in Li­mas­sol, Tel: +357 25272820

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