Making sure the right people get the right money at the right time:
Planning to avoid death duties should be a key component of your estate planning. I do not know many people (if any), who prefer to bequeath money to the taxman, rather than their children. Luckily, with advance and appropriate planning in place, inheritance taxes can usually be avoided or mitigated.
Estate planning usually involves more than avoiding such taxes. Many people prefer to decide in advance who will inherit their assets, officially allocating them among their beneficiaries well in advance of their death. In order to avoid any misunderstandings or arguments later, it is best to do this with official documentation.
Most people use a Will or Wills (expatriates may need to have more than one Will, to cover assets located in different countries). You could also use a trust, which may help you avoid inheritance tax at the same time.
You may decide that your daughter is to inherit all her share of your estate at once, but you could also choose to allocate it to her as and when she needs money. This sort of planning can come in useful if you are worried that the person inheriting your money is not used to dealing with large amounts, or if they are a spendthrift and you want to prevent them spending their inheritance too quickly and unnecessarily.
You can also ensure that, if your child’s marriage breaks up, the inheritance you intended for your child does not disappear with your son-in-law or daughter-in-law, unless this is what you wish!
Estate planning could also include instructions on long-term care for your spouse should you pass away before him/her, or what should happen to the money should they become unable to make financial decisions.
The key issue with estate planning is ensuring your financial affairs are completely in order well in advance. This will give you the peace of mind of knowing that your family, and any other beneficiaries, will not encounter unnecessary difficulties when they inherit their share of your estate. You want them to inherit the money or assets as quickly, cheaply and hassle free as possible.
One aspect some people fail to think about is whether their affairs would survive scrutiny by the taxman. Some people who set up their tax planning a few years ago may have used methods which, while fairly commonplace at the time, were not legally compliant. They may either not realise that regulations have changed, or else are prepared to take the risk. The question is though, would your spouse or children be happy to take the risk too? Would they be capable of facing a tax investigation and would you want them to go through this?
As an example, let’s say that Mr X has an Isle of Man bank account worth 150,000 pounds sterling. He opened the account 15 years ago, while UK resident, with 50,000 pounds sterling and increased its value over the years. He has recently moved to Portugal and leaves his daughter, Miss X, the account in his Will. He has never declared the interest to the tax authorities in either the UK or Portugal. Unfortunately, his retirement is short-lived, and Miss X inherits the money sooner than expected.
What is also unexpected is the choice Miss X must make. This account has been earning interest for 15 years, but it has never been declared for tax. If Miss X keeps quiet about it, she will be undertaking a criminal activity. If she declares it to the tax authorities, she will lose a lot of the money – she may have to pay all the back tax due on it, plus interest. She may escape penalties because she herself has not done anything wrong, but the authorities may investigate the capital in the account to see whether it is fully legal. Any money ruled to be the proceeds of crime may be confiscated. Miss X herself is not very financially astute, so dealing with all this is rather frightening, not to mention time consuming.
If Miss X does not declare the account, there is a good chance she will, at some point, be found out. The UK has a Proceeds of Crime Act, whereby if any financial professional or lawyer has a suspicion of tax evasion, he/she must report it to the Serious Organised Crime Agency (SOCA). If Miss X does not realise that there was anything untoward about the account, she could easily mention it to her financial adviser, and the tax investigation ball would start rolling.
The UK Revenue’s recent high court victory over Barclays Bank could also mean that Miss X’s bank, at some point, gives her Isle of Man account details to the Revenue.
The rules and regulations keep changing, always in favour of the taxman. At some point, the Isle of Man will stop withholding tax and report all interest earned in its bank accounts to the tax authorities in both the UK and Portugal. And, who knows what new powers the taxman will have in five or 10 years time?
This is just an example, but it is worth taking a little time and effort now to ensure that your financial affairs are in complete (and legitimate) order, to prevent your spouse, daughter, son or grandchild being faced with any unnecessary hassles when they inherit your money.
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