Background

For the past decade, Michael has lived in the United Kingdom, although he is not officially considered a UK citizen or resident at the moment. He possesses a wealth of £3 million that he intends to distribute among his nieces and nephews living in the UK. Despite not being legally married or in a domestic partnership, and not owning a property that qualifies for the Residence Nil Rate Band, he is seeking a way to minimize his Inheritance Tax (IHT) liability while ensuring he can have complete access to her assets.

Advice

FOL Wealth Investment Bond Advice London evaluates the circumstances and highlights these key points about Michael -

• The property that Michael owns completely is not subject to IHT if it's situated outside the UK, since it's considered 'excluded property'.
• This IHT status also applies to Michael's shares in an Authorised Investment Fund, or in other words, Open-Ended Investment Companies (OEICs).
• Should Michael continue to live in the UK, he will be considered a UK resident and therefore his overseas property will also fall under IHT.
• However, if Michael buys an investment abroad at this moment and later becomes a resident of the UK, then this investment will be liable to IHT should he still be the sole owner at the time of the transaction or upon his passing.
• Considering the intricacies involved, FOL Wealth advised Michael to seek proper legal counsel prior to making any decisions. In light of this, our suggestion is that he proceeds with applying for a £2,675,000 International (Offshore) Capital Redemption Bond, after which he should finalize setting up an Excluded Property Trust (EPT).

Michael discovers that -

• He needs to be established outside of the UK when he begins.
• If he moves to the UK, he should refrain from increasing the Bond within the trust or adding any additional assets to the trust.
• The board of trustees is required to maintain the property that is being left out.
• The EPT type of trust allows her to be considered a possible inheritor.
• Setting up the trust will not trigger a taxable lifetime gift, and there will be no fees associated with withdrawing the assets or reaching the ten-year mark.

Outcome

Michael comes to a deeper understanding of the idea behind domicile, discovering that it's not exclusively tied to tax but rather pertains to a broad area of law, which categorizes domicile into three types. The first type is a domicile of origin, which Michael inherited from her father at birth, marking her as having an international domicile. The second type could potentially be swapped for a domicile of choice in the UK if he chooses to be a permanent resident here, although that option doesn't currently apply to Michael's situation. The third type, artificial deemed domicile rules, concerns long-term residents of the UK. According to these rules, Michael would be considered domiciled in the UK for all tax-related purposes once he has been a resident for 15 of the last 20 years. Domiciles in the UK are liable for Inheritance Tax on worldwide assets, though any property placed in an EPT (Excluded Property Taxation Scheme) set up for the UK by someone not domiciled there upon setup will be exempt from Inheritance Tax.

Michael submits a request for a £2,675,000 International Capital Redemption Bond. Following that, he finishes the discretionary Execution of Promissory Note (EPT), leading to the immediate placement of the Bond in the trust. This process is simply accomplished by adding the date of his application to the deed. He becomes a trustee by default and selects two more trustees who reside in the UK and are familiar with her specified distributions of the trust's assets upon her demise. He retains the option to change the trustees at any time if required. The responsibilities of being a trustee adhere to the Fourth and Fifth Money Laundering directives.

Also Read: Financial Protection for Millennials

The trust's documentation features pre-drafted potential beneficiaries, but this category does not encompass nieces and nephews by default. Initially, the trustees have the authority to include nieces and nephews in this category, provided Michael consents or requests this inclusion in a written agreement.

Throughout her life, Michael has access to the funds within the EPT, as he is among the potential beneficiaries. Once these funds exit the EPT, they are no longer subject to Inheritance Tax (IHT) within the trust's framework.

For tax planning regarding Inheritance Tax (IHT), there are no tax consequences for -

• Transferring assets into a trust
• Passing away within a seven-year time frame
• Tenth milestone
• Funds leaving the trust

Regarding the International Bond, Michael discovers that it will benefit from a gross roll-up, subject to any taxes that cannot be recovered. However, there will be no tax obligations unless a taxable event occurs, after which any gain from that event would be subject to taxes. The advisor clarifies that a Capital Redemption Bond doesn't have any guarantees linked to specific lives, which means it cannot disburse funds upon the death of the last guarantee but will instead continue until it matures over a 99-year period. This arrangement empowers the trustees to decide when a taxable event happens, typically leading to the bond being surrendered before that event.

For tax on bonds, Michael is the settlor of a discretionary trust located in the UK with trustees in the same country. He is subject to taxes as long as he is alive and living in the UK during the year the gain is realized. Should the gain materialize after her death, the trustees will be taxed at trustee rates. It's made clear to Michael that there is no opportunity for top slicing relief for trustees.

Following her demise, the bonds can be transferred to the beneficiaries, who become liable for taxes if they cash them in. It's mentioned that once the beneficiaries reach the age of 18, the trustees have the authority to assign portions to them, allowing the gain to be allocated to the appropriate beneficiary. Until then, it's possible to irrevocably assign portions to a bare trust for the sole benefit of a specific beneficiary. Under the current tax regulations, any gain can be deducted against other taxes.

• Money not used from your personal allowance
• Money not used from your £5,000 0% Starting Rate for savings

• Money not used from your Personal Savings Allowance

Summary

Putting an International Bond in a discretionary EPT that he could benefit from offers Michael a versatile, tax-effective option. If he passes away while being a resident of the UK, the assets held outside the trust (which amount to £325,000 at present) could be protected by her Nil Rate Band. The property not included in the EPT will not face IHT tax.

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