Inheritance tax, and how the Dukes of Westminster avoid it on their £9bn fortune.

By Kieran Drew
In August 16, 2016
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Clever planning has enabled the Grosvenor family – whose head is the Duke of Westminster – to pass assets down the generations without attracting inheritance tax despite a family fortune estimated at £9bn.

Successive generations are trustees rather than direct owners of the assets,

As reported in the Telegraph, ‘The trustees are legal owners but not ‘beneficial owners’. As legal owners the trustees can do anything an ordinary owner can do, in terms of selling and trading the assets within the trust. But they do not have ‘beneficial access’ or absolute rights as individuals to the assets. Put simply, this means they cannot claim the assets for themselves or sell them and keep the proceeds.

The assets are consequently not inside their individual estates for inheritance tax purposes.

Income and other benefits can be paid out to beneficiaries, who may or may not include the trustees, and who will be taxed on them as normal.

What about the Duke’s other assets – surely there will be inheritance tax there?

As with all families there are strategies that can be used to cut the bill but death duties on directly owned assets (including properties, artworks and other investments) cannot be entirely avoided.

Above the “nil-rate band” – what every individual can leave free of death duties – the value of an estate is taxed at 40%.

Help protect your loved one from a 40% tax bill

The nil-rate band is currently £325,000 per person, or £650,000 per couple. (It is being extended in a controversial new change to include a “family home allowance” of £175,000 per person.)

These thresholds are of little relevance where estates are measured in tens or hundreds of millions of pounds.

The Duke of Westminster is survived by his 57-year-old wife, Natalia. As with all married couples the surviving spouse can inherit assets free of inheritance tax without limit.

However if, as reported, the bulk of the Westminster estate goes to the late Duke’s only son, Hugh, who is in his 20s, tax will be due on the late Duke’s directly owned assets above the threshold.

What about giving assets away?

Yes, you can give anything to anyone and provided you survive seven years, the gift is free of tax. The problem here is that older generations usually want to keep full control of their wealth until the next generation is fully prepared.

Discretionary trusts can be used where parents or grandparents want to maintain control over assets while keeping them outside of their estate for inheritance tax purposes.

Beneficiaries and terms can be changed by the trustees. The “settlors” (people giving the assets to the trust) need to survive seven years for those assets to move entirely out of their taxable estate.

These trusts can ring fence assets from events such as divorce or unsuitable marriages.

“Absolute” or “bare” trusts are different in that no tax is payable when the assets go in. But they’re not flexible. The beneficiary cannot be altered.

Inheritance tax | How does it work?

Each individual is taxed at a rate of 40pc on all their assets above a threshold of £325,000.

From April 2017 a new, higher threshold including a “family home allowance”, will begin to be phased in.

This will be worth £100,000 in 2017-18, £125,000 in 2018-19, £150,000 in 2019-20, and £175,000 in 2020-21.

This means that married couples will be able to pass on estates worth up to £1m to their direct descendants, including a family home.

People who sell an expensive property will be eligible for an “inheritance tax credit” so can still qualify for the new threshold, as long as most of the estate is left to descendants.

 

If you would like to learn more, at Redwood we can book a free initial meeting to discuss your options, or why not join us at one of our upcoming free to attend Wills, Trusts and Estate Planning seminars.

Further information can be found at:

http://www.redwoodfinancial.co.uk/events/

 

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