Because they were intending to spend more time in the UK with family, they wanted to mitigate any potential liability for the various forms of UK taxation, particularly IHT.
The majority of their wealth was split between real estate, stocks and bonds.
Without adjusting their financial plan, Mr. and Mrs. Smith were about to become liable for over £80,000 in annual income tax in the UK. They would also have a significant capital gains tax liability in the near-term, as they intended to sell international assets after becoming UK tax resident.
Additionally, if the unthinkable were to happen and both Mr. and Mrs. Smith were to die immediately, the IHT liability would be well over £3million.
AssumptionsWe identified that Mr. and Mrs. Smith were going to become UK residents for tax purposes, based on the number of days they intended to spend in the UK, and various ties, including the accommodation tie. As UK tax-residents, they would be liable to UK income tax, capital gains tax and IHT on their worldwide assets.
We identified they had a balanced attitude to risk investments. And for IHT purposes, we assumed that on first death, Mr. or Mrs Smith would gift all assets to the other, and therefore based our calculations on their joint estate and a total Nil Rate Band of £650,000.
Income and capital gains taxesAs the article’s title suggests, this is a case study to demonstrate how you can reduce or remove your own IHT liability. However, it’s worth noting that within the overall strategy we created for Mr. and Mrs. Smith, we were able to remove their entire income and capital gains tax liabilities as well.
Inheritance tax factsIn an earlier article I explained UK inheritance Tax rules for Expats.; the only thing I’d like to add to that article here, is that there is a tapered withdrawal of the new additional nil rate band (NRB) for estates with a net value of more than £2m. This is at a withdrawal rate of £1 for every £2 over this threshold. Because of this, clients Mr. and Mrs. Smith were not going to benefit from this additional NRB due to the value of their estate.