Are Offshore Trusts Still Suitable for Expat IHT Planning?

Is an offshore trust the best tool for an expat to use to protect all their assets and ultimately their estate from inheritance tax liabilities?

The British government is constantly chipping away at the effectiveness of offshore trust structures in inheritance tax planning strategies for British citizens, and their latest changes to the way trusts are taxed have further reduced the usefulness of these tools for many.

So the question is, are offshore trusts still suitable for expat IHT planning, after all, Britons living abroad and who are tax resident elsewhere often have no liability to the likes of income or capital gains tax in the UK once their nation of tax residence alters.  Therefore, could an offshore trust be a suitable vehicle for an expatriate to use when it comes to the structuring of their affairs to legitimately reduce their estate’s IHT burden?

Many in the financial services industry say ‘no’ – they feel that the restrictions now placed on the creation of a trust, on the settlor, beneficiaries and trustees are too strict, and that the tax treatment of these vehicles makes them unattractive.  However, there are alternatives that expatriates can explore…

According to the Sovereign Group, which specializes in the structuring of compliant solutions for their international client base, the latest government changes to the tax treatment of offshore trusts makes them unsuitable for most British domiciled individuals – no matter where in the world they live.  This is because Britons retain their nation of domicile when they simply move overseas, and it is their nation of domicile that determines whether the British tax authorities can tax their estate upon death. 

What this means is that offshore trusts are no longer suitable for most British expatriates who wanted to use them as a tool for IHT planning.  If you have a trust in place already and you are concerned about this information, we recommend you speak to a specialist financial adviser as soon as possible.  Do not take any action before taking advice, as any action you take could have massive ramifications on your tax treatment today, and on the tax treatment of your estate upon your death.

In terms of the changes the government has proposed, in the pre-budget report released in November last year it was suggested that the dividend trust rate be increased to 37.5% and that the trust tax rate be increased to a whopping 45%.  Both suggested changes are due to become effective from April 2011.  So, as stated, if you are concerned about this, take advice sooner rather than later…however, if you have yet to structure your affairs to protect your heirs from an inheritance tax burden, now is the right time to explore the other options you have. 

As an expat you have a wealth of choices open to you, with some advisers suggesting the utilization of EIS schemes for example.  The inheritance tax relief from these generally applies to holdings in qualifying unquoted and AIM-quoted companies if they have been held for more than two years at the time of death of the investor, and this information is based on current tax rules and regulations.

If you’re an expatriate and you’re concerned about the fact that your estate may be liable for IHT duties after you’re gone, you have a real obligation to your heirs to look into how best to structure your affairs to legitimately reduce their inheritance tax burden in the future.  Speak to an adviser today – and remember that legislation changes all the time, so have regular reviews of how your affairs are structured to ensure they remain compliant and best suited to the task in hand – i.e., offsetting IHT liability.