Month: May 2020

Background

The recent pandemic is causing many individuals to re-evaluate what is of key importance in life.

CV-19, unwelcome in so many ways, has caused us to draw breath and consider that ‘fast and frantic’ may not be the best approach to life.

What Are the Alternatives?

People and their families are spending more time together and finding alternative ways to keep occupied, centred around the family home. Although restrictive, many have discovered new levels of appreciation of family and lifestyle during this time. New ways have been found to relax, including family exercise, new hobbies, a healthier focus on life, and calming and wellbeing focused activities.

Longer Term Alternatives

Longer term, a slower pace of life on an on-going basis, has become more attractive, to many.

One way to achieve this is to move location and a small island destination can be of appeal.

Not only is the lifestyle refreshing but an island can be ring-fenced rapidly when a crisis occurs, as witnessed with CV-19. The flow of people in and out can be restricted far more easily when a country does not have ‘on-land borders’ and is not a central hub for flights.

Dixcart Domiciles

Dixcart Domiciles assists individuals to relocate and/or to take up alternative residence or citizenship options.

Life-style related factors will always be a priority, and particularly so in the future due to recent circumstances. However, movement to a jurisdiction with an attractive tax regime will often be a major influencer as well, together with other financial and wealth planning factors including few or no forced heirship rules, a lack of exchange control, and a business-friendly environment encouraging and enabling entrepreneurial activity.

Lifestyle: Guernsey

The island of Guernsey is the second largest of the Channel Islands, which are situated in the English Channel close to the French coast of Normandy. It is well known for its temperate climate, relaxed high quality of living and has a quintessential British charm.

In addition to Guernsey, the island of Sark falls within the Bailiwick of Guernsey. Sark is a small island (2.10 square miles) with a population of approximately 600 and has no motorised transport.

The island of Guernsey is about 79 square kilometres, with almost the same area of stunning coastline. It has an approximate population of 65,000, with a warm and thriving community. It combines many of the reassuring elements of UK culture, with the benefits of living abroad.

Guernsey is perfect for families. Crime is extremely low on the island and the education system is superb. Guernsey offers around 2,000 hours of sun per annum and there is a range of sport and leisure activities available for all ages. These range from coastal walks, cycling, and golf, to surfing, sailing and diving. 

Lifestyle: Isle of Man

The Isle of Man is situated in the Irish Sea, centrally located between England, Ireland, Scotland and Wales and it is a beautiful place to live. Whilst the island may be small, just 572 square kilometres, with its rugged coastline and rolling hills, it offers plenty of space for families to breathe, relax and enjoy what island life has to offer.

The Isle of Man has been a self-governing Crown Dependency since 1866, and this political independence, combined with its strong democratic values, have enabled the Isle of Man to be governed efficiently over the past 154 years.

The Isle of Man Government adopts a forward-thinking and pragmatic approach, which allows the close-knit community of approximately 85,000 people to benefit from a healthy and relaxed lifestyle. The Isle of Man Sports Council supports various sport activities across, and the island is recognised as having one of the lowest crime rates across Europe. In the recent few years, the government has invested in programmes to modernise schools, and transport. In addition, the island has a high-quality workforce and access to a very good health care system.

Lifestyle: Malta

Malta offers the climate, the relaxed lifestyle and rich history to make living on this island, a real pleasure. Malta is a popular tourist destination with its warm climate, numerous recreational areas, and architectural and historical monuments, including three UNESCO World Heritage Sites.

Located in the Mediterranean, just south of Sicily, Malta offers all of the advantage of being a full member of the EU and Schengen Member States and has English as one of its two official languages. Malta is also very well connected with most of the international airlines (such as British Airways, Lufthansa, Emriates, Qatar, Turkish Airlines, Ryanair, EasyJet, WizzAir and swiss, to name a few), which fly to Malta almost daily.

With a population of about 475,000 over an area of 316 square kilometres, Malta is the world’s tenth smallest country in area and fifth most densely populated sovereign country. Its capital is Valletta, which is the smallest national capital in the European Union by area.

Its location in the centre of the Mediterranean has historically given it great strategic importance as a naval base, with a succession of powers having contested and ruled the islands. Most of the foreign influences have left some sort of mark on the country’s ancient history.

Malta’s economy has enjoyed large growth since joining the EU and the forward-thinking Government actively encourages new business sectors and technologies.

Lifestyle: St Kitts & Nevis

St Kitts & Nevis offers an extremely appealing Caribbean lifestyle.

The Federation of St Kitts & Nevis is made of up two islands situated in the Caribbean Sea and are approximately three hours by plane from Miami, four hours by plane from New York and eight hours by plane from London. There are direct flights from all of these cities and many local air connections to other Caribbean islands.

St Kitts & Nevis has a population of approximately 53,000 and English is the official language. Before gaining status as an independent country in 1983, St Kitts & Nevis was part of Britain for over 200 years, which is why British traditions still play an important role in the diverse culture of the islands.

St Kitts & Nevis has a tropical climate, with little variation and is therefore warm and sunny throughout the year. The islands have a volcanic origin and are dominated by centrally located mountains and tropical rainforests, fringed by beautiful sandy beaches and palm trees.

Real estate is of international standard. Applicants have the choice of investing in unique real estate or buying into a premier market with a ready inventory of condominiums, apartments, hotels, villas, and luxury homes, which continue to be developed across the islands. 

How Can Dixcart Help?

• Dixcart offers advice and assistance to individuals seeking to relocate to; Guernsey, Isle of Man, Malta, and St Kitts & Nevis.

Additional Information

If you require additional information regarding relocation to any of the jurisdictions detailed in this Information Note, please contact: advice@dixcart.com or speak to one of the following Dixcart contacts:

• Bruce Watterson (Guernsey): advice.guernsey@dixcart.com
• Paul Harvey (Isle of Man): advice.iom@dixcart.com 
• Henno Kotze (Malta): advice.malta@dixcart.com 
• John Mellor (St Kitts & Nevis): advice.nevis@dixcart.com 

Dixcart Trust Corporation Limited, Guernsey: Full Fiduciary Licence granted by the Guernsey Financial Services Commission, registered company number: 6512.

Dixcart Management (IOM) Limited is licensed by the Isle of Man Financial Services Authority.

Dixcart Management Malta Limited Licence Number: AKM-DIXC-23

Background

UK inheritance tax should be carefully considered, and appropriate tax planning should be taken by all individuals who have assets in the UK, not just those that live in the UK.

What is UK Inheritance Tax? 

On death, UK inheritance tax (IHT) is at a rate of 40%.

IHT is a tax on money or assets held at death, and on some gifts made during a lifetime (most importantly those gifts made less than 7 years prior to death). 

A certain amount can however be passed on tax-free. This is known as the ‘tax-free allowance’ or the ‘nil rate band’.  

Each individual has a tax-free inheritance tax allowance of £325,000. This allowance has remained the same since 2010-11. In the case of a married couple this tax-free allowance can be passed onto a surviving spouse, which means that, following their death, the estate will enjoy a £650,000 tax free allowance.

Additional Nil Rate Allowance

Individuals who died after 6 April 2017, with an estate value greater than their tax-free allowance of £325,000, due to the value of their home being passed to their children, may pass on an additional tax-free allowance. In tax year 2020 – 2021 this additional amount is £175,000 per estate.

Lifetime Gifts

Gifts made more than seven years prior to death, without the retention of a benefit (such as continuing to live in a gifted property rent free), will not be included in the deceased’s estate. Any gifts made within seven years will, in most circumstances, form part of the estate.

Gift Allowances

There are certain gift allowances that can be used year on year, where the seven-year rule is not applicable. The six key gift options are detailed below. These options, if planned for properly across several years, can reduce the inheritance tax liability considerably.

Dixcart recommends that a record of all gifts made is kept with the Will.

• Give away money each year – each year an individual can give away up to £3,000. This gift can be to anybody or split across any number of people.
• Wedding presents – parents can each give a wedding gift of up to £5,000 to their children. This gift allowance must be made before the ceremony.
• Unlimited small gifts – an unlimited number of gifts of up to £250 each in any tax year can be made as long as they are to different people.
• Charitable donations – charitable gifts are free from inheritance tax. If at least one-tenth of net wealth (calculated as a percentage of the estate, on death) is donated, the Government has the discretion to cut an individual’s inheritance tax rate from 40% to 36%.
• Contributing to living costs – money used to support an elderly person, an ex-spouse, and/or a child under the age of 18 or in full-time education is not considered to be within the deceased’s estate on death, whatever amounts have been paid.
• Payments from surplus income – an individual with surplus income should not ignore the opportunities provided by this provision. If the criteria, detailed below are met, the seven-year period is not relevant:

1. it was made as part of the usual expenditure of the transferor; and
2. the transferor retains sufficient income to maintain his usual standard of living, having taken account of all the income transfers that form part of his usual expenditure.

Does UK Inheritance Tax Apply to a Non-UK Tax Resident? 

The UK inheritance rules are different depending on a person’s domicile.  The concept of domicile is based on a complex set of laws (outside the scope of this note). However, as a broad overview, an individual is domiciled where they consider themselves to be indefinitely settled and “at home”. There may also be estate or inheritance tax liabilities in other jurisdictions.  Therefore, local advice should be taken in any jurisdiction where taxes might be chargeable. 

For UK IHT purposes, there are three categories of domicile:  

• UK Domiciled – the worldwide assets of the individual will be subject to UK inheritance tax, whether the individual is UK resident or not.
• Non-UK Domiciled (“non-dom”) – the assets of this individual, situated in the UK, will be subject to UK inheritance tax irrespective of whether the individual is UK resident or not.
• Deemed UK Domiciled – where an individual is a non-dom but has lived in the UK in 15 out of the previous 20 tax years (prior to their death). According to UK inheritance tax rules he is considered to be UK domiciled and his worldwide assets will therefore be subject to inheritance tax on his death. The rules are slightly different if the individual has fulfilled this requirement but is no longer resident at the date of their death although IHT may well still be chargeable in this instance. 

When an individual moves to the UK, dependent on all of the circumstances of the move and the new life adopted in the UK, there may be an argument that an individual has immediately become UK domiciled.  Even if this is not the situation, once an individual has lived in the UK for 15 years, he/she will be deemed domiciled for UK inheritance tax.

As is often the case, a complex set of laws is best considered through explanatory examples. 

Tax Planning Opportunities for Non-UK Tax Residents 

Tom is an Australian citizen; he was born in Australia and has always lived and worked there. He is a UK non-dom and has a net worth of £5m.  He is divorced with one child aged 19. 

Tom’s child, Harry, chooses to study at a university in the UK and Tom is aware that UK real estate has over the last few years shown some good returns. 

Tom purchases a property in his sole name, mortgage free, near to his son’s university in the UK for £500,000 for his child to live in while studying in the UK. 

Planning Opportunity 1: Property Ownership 

Even though Tom is not UK tax resident and is non-dom, any assets that he has in his own name situated in the UK are subject to UK inheritance tax on his death.  If Tom dies while owning the property, leaving his whole estate to Harry, there will be a tax liability of £70,000 on his death.  This is 40% of the value of the property above the £325,000 nil rate band, assuming that Tom has no other UK assets. 

• Tom could have considered purchasing the property jointly in the name of himself and his son. Had he done so; on his death the value of his UK asset would have been £250,000.  This is below the nil rate band threshold and therefore no UK inheritance tax would be payable. 

Planning Opportunity 2: Remittance of Money 

Tom is getting close to retirement and decides to move to the UK to be with his child, who has settled in the UK after finishing university. He sells his Australian home but keeps his Australian bank accounts and other investments. He sends £1m over to a newly opened UK bank account before moving to the UK, to live on once in the UK. 

• Tom would be better advised to remit these funds to a tax neutral, sterling jurisdiction, such as Guernsey or the Isle of Man. If Tom was to die before becoming domiciled for UK inheritance tax purposes, these funds would be outside the inheritance tax net.
• By structuring such an account correctly, Tom could bring capital only to the UK and thereby avoid any obligation to pay income tax. Please contact Dixcart to take advice on this topic, prior to moving to the UK.

Planning Opportunity 3: Use of a Trust 

Tom dies having lived in the UK for 25 years of his retirement.  He leaves his whole estate to his son.  As Tom was deemed domiciled at death, his entire worldwide estate, not just his UK situated assets, will be subject to UK inheritance tax at 40%, except for the nil rate band at the time of his death.  If his estate is still worth £5m, the inheritance tax payable will be £1.87m at current rates and nil rate band. 

• Before Tom became deemed domiciled in the UK, he could have settled the non-UK assets he still had into a non-UK resident discretionary trust (traditionally in a tax neutral jurisdiction). This would place those assets outside his UK estate for UK inheritance tax purposes. Following Tom’s death, the trustees could distribute the trust assets to Harry; achieving the same results as a will but passing on the assets free from inheritance tax liabilities. 

Planning Opportunity 4: Distribution of Assets from a Trust 

Following Tom’s death, his son decides to leave the UK for New Zealand, having lived in the UK for the previous 30 years.  He sells all of his properties and other assets and deposits the proceeds in a New Zealand bank account. He dies within a year of moving to New Zealand. 

As Harry only left the UK a year prior to his death, he will still have been UK resident for more than 15 of the previous 20 years.  He will therefore still be considered UK deemed-domiciled at death and his entire estate would be taxable to UK inheritance tax at 40%, even though he had no assets in the UK on his death. 

• Rather than the trustees distributing the assets to Harry on his father’s death, it might have been prudent for the trustees to only distribute assets as needed by Harry over time. This would mean that the entire estate would not be in his name on his death and would not therefore be subject to inheritance tax in the UK.  The assets would remain in the trust and be available for future generations of the family. Advice should be taken on distributions from a trust to ensure that these are as tax efficient as possible. 

Summary and Additional Information

UK inheritance tax is a complex issue. Careful consideration and advice need to be taken regarding the best manner to structure the holding of UK assets. 

It is important for both UK and non-UK tax residents to take advice, as early as possible, and this should be reviewed regularly to allow for any changes in the law and/or family circumstances. A number of important tax planning steps can be put in place, in particular for non-UK tax residents.

If you require additional information on this topic, please contact Paul Webb or Peter Robertson at the Dixcart office in the UK: advice.uk@dixcart.com.