In this real-life case study, we explore the key areas of succession planning, inheritance tax and forced heirship for a high net-worth family of mixed ethnicity.
Background
The husband, aged 61, was born and educated in India before moving to the UK where, as a young man, he built up a retail chain, which he sold in 2010 for a substantial sum. He married a British lady, now 57, and they have two daughters, aged 29 and 27.
The couple live in Dubai but their daughters, both of whom were born, educated and live in the UK, are married to men of British origin and domicile. Neither of them have children but they both eventually hope to start a family.
The immediate family relationships are stable and none of them have any intention of ever living in India. However, the husband has three brothers still resident in India, with whom he has a strained relationship and he desires that no wealth should pass to them or their families on his death.
The couple has £5m ($6.49m, €5.55m) in liquid assets held in cash and investments, almost entirely in the husband’s name. They have four UK properties, all mortgage-free and let, worth £1.4m. All four are owned in the husband’s name and show only a small capital gain.
Their main home in Dubai is valued at AED6.5m (£1.36m, $1.77m, €1.54m) with a mortgage of AED3m and is their only major jointly owned asset.
The husband is semi-retired with UAE business interests, but plans to fully retire within two years. They have no immediate intention to return to the UK but are likely to do so for part of the year if they have grandchildren. They will keep a property in Dubai but hope to downsize with no mortgage.
Once fully retired, they expect to require £100k-120k pa of additional income, net of tax, from investments.
Considerations
The husband and wife were particularly concerned about forced heirship and required a structure to be put in place that would ensure assets pass appropriately down their bloodline. Additionally, given substantial, multi-jurisdictional assets, a mixed UK domiciled/non-domiciled marriage and UK inheritance tax (IHT), they required planning.
The double taxation agreement for IHT between India and the UK also needed advice and it is important to consider in whose name assets should be owned, now and in the future.
The desire to clear their mortgage on the UAE property had to be discussed, as did how best to produce the additional income in retirement, and whether the possibility of future UK residency will affect that planning.
The advice
The domicile of each family member is first established. The husband, who was born in India after the partition in 1947 to Indian parents, is not UK-domiciled by origin. He was UK-resident for 31 years until 2012 and is no longer deemed domiciled.
He has no definitive intention to live permanently in the UK in the future, so, at present, he is considered non-UK-domiciled.
Whether he may become UK-domiciled in the future must be considered with reference to the 1956 treaty provisions, which preclude taxation of non-UK situs assets for those individuals deemed UK-domiciled, but also domiciled in India under local domestic law, the latter of which is not clear in this case.
As a result, we planned on the basis of non-UK-domicile status today but with the option of becoming UK-domiciled in years to come.
The domicile of the wife is clear: born to parents of UK descent, she has a UK domicile of origin. Married after 1974, she does not have a domicile by marriage and has not established a domicile of choice elsewhere.
Despite being born in the UK, the domicile of origin of the daughters is arguably not UK, given their father had only resided in the country for a few years before they were born. They currently intend to remain in the UK permanently and do not have a domicile in India under local domestic law. As a result, they are UK-domiciled at this time.
Irrespective of domicile or residency, the UK properties will be subject to UK IHT on second death. For simplicity, life assurance could be arranged in trust to cover the tax liability but the couple decided they had liquidity to pay the tax should they both die prematurely, and further planning should be considered in due course.
Capital gains tax is not an issue due to negligible growth, and income tax is payable on rent in excess of the personal allowance. The couple will occupy one of these properties if they return to the UK and require a UK will to ensure succession to their daughters.
The UAE property requires planning. For succession purposes, it is sensible for the downsized property to be in the name of the wife only. A suitable will can then pass ownership to the daughters and should avoid forced heirship to family members in India.
However, unless a mortgage is maintained, this may generate a UK IHT charge.
Alternatively, maintaining joint ownership with a mortgage would help, with only the equity at risk of passing to primarily male heirs. The outstanding debt and joint ownership, plus the possible non-domiciled status of husband at the time, will negate IHT.
Planning with the cash and investments was kept simple. The advice is to maintain a suitable cash balance outside of the structure with the remainder in an offshore portfolio bond in the name of the husband.
Once fully retired and potentially UK-resident, gross roll-up will apply and 5% tax-deferred withdrawals will cover any extra income needs. If extra capital is needed, there is a build-up of time-apportionment relief and top-slicing, plus the option of assigning segments to the most appropriate taxpayer.
Non-domicile status allows the bond to be settled into a settlor included discretionary trust as excluded property.
Succession planning naturally occurs as desired, along with asset protection in the event of, say, a divorce in the family.
Interest-free loans to UK-domiciled beneficiaries, not capital advancements, will aid IHT planning for future generations by creating debt on their estate.
Summary
While the values are above average, this is not an untypical expat family structure. I am finding significant opportunities for excluded property provision rather than allowing a future UK-deemed domicile to provide IHT issues with relevant property.
Trust planning internationally is underused and the benefits of succession planning, asset protection and the use of loans from trusts to create additional debt are being missed.
Further reading:
Examining the complexities of multi-jurisdictional planning
