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Reflective of the current fiscal zeitgeist is a shift in focus away from income taxes to wealth taxes – making the question of how to protect personal assets a more pressing issue for taxpayers.
Asset protection strategies offer a range of legitimate ways to shelter wealth from external threats – be that ex-spouses, creditors, the tax man on death or others – while balancing the need of the owner to access, control or derive income from said assets.
Before opening the asset protection toolkit, start by determining your specific requirements and personal circumstances.
What do you want to achieve from an asset protection strategy? For example, you may want to consider:
Factual determinants when assessing the suitability of a structure include:
Your UK tax position will be determined by reference to the Statutory Residence Test.
Even if you live abroad as a UK expat, you may still be liable to UK taxation. If you hold non resident tax status, you should expect to be chargeable to UK income tax on certain forms of income such as property and employment arising in the UK, IHT on your worldwide assets and UK capital gains tax on residential UK property, under the Non Resident Capital Gains tax (NRCGT) scheme that took effect from 6th April 2015. These factors could influence your choice of protection structure, transfers of assets and distribution of income arising.
For non-UK domiciled individuals (‘non doms’) – the UK tax position is relatively favourable due to the availability of the remittance basis of taxation for income tax and CGT purposes, and only being subject to IHT on UK assets, but nevertheless the tax implications need to be factored in when considering asset protection.
In particular, care should be taken if an individual is, or will become, ‘deemed domiciled’ as a result of being resident in the UK for 15 out of 20 tax years, resulting in the loss of the ability to claim the remittance basis and, moreover, worldwide assets becoming subject to UK IHT.
Furthermore, such individuals should be aware of the implications of holding UK residential property through offshore structures which until 6 April 2017 ensured that they were treated as non-UK assets.
From that date, however, the value of shares in offshore companies attributable to UK residential property will potentially fall within the UK IHT net.
Having established your requirements and objectives, these should be looked with professional advice at against the myriad of tools potentially available for individuals to shelter wealth from threats. Many exist, here we look at a selection in overview:
Trusts remain a commonly-used and flexible tool for asset protection purposes. Various types of trust exist, and it will be important to consider the characteristics of each trust against your objectives to best meet your needs.
Trusts enable you to transfer an asset while retaining varying degrees of control, such as the ability to direct the distribution of income to specific beneficiaries, while sheltering the asset from external parties (including the beneficiaries themselves).
In other words, by way of example, a beneficiary may enjoy the income produced by the trust assets, but the trustees own the capital preventing a beneficiary from disposing of it. Grandparents for example gifting into trust can as a result see the asset removed from their estate in time – thereby reducing IHT liability – but still retain some measure of control over how that asset is used, which may be particularly attractive where beneficiaries are young.
It will be important to seek advice on selecting the most appropriate type of trust, setting up the trust in a way that specifically addresses needs (certain types of trusts are then fixed for the duration and cannot have terms amended), as well as understanding what this means in ongoing administration and cost terms.
Offshore trusts may be particularly attractive to non-UK domiciled individuals, particularly those which are treated as “protected” and limit the effect of the new deemed domicile regime applying from 6 April 2017.
Since a company is a separate legal entity to the owner or shareholders, the ‘veil of incorporation’ protects the business owner and their personal assets from claims arising during the normal course of business. However, this ‘veil’ may be pierced if found to be trading fraudulently.
Family Investment Companies (FICs)
FICs are limited companies used for holding investments, the income of which can be applied for the benefit of one or more members of a family. They are not subject to the same transfer implications as for example transfers into trusts. Whereas transfers to trusts – absent availability of reliefs – will crystallise inheritance tax charges immediately, this is not the case for FICs.
Foundations are essentially a hybrid structure. The foundation is a separate and distinct legal entity in the same vein as a company, while offering a similar degree of protection as a trust. By transferring an asset into a foundation, the foundation retains legal and beneficial ownership of the asset.
Transferring assets to structures for asset protection purposes is likely in most cases to have wider tax implications, such as triggering liability to capital gains tax and inheritance tax, or even result in the loss of valuable reliefs that previously existed. This may not be of concern where asset protection is your primary driver over tax-efficiency, but should still be taken into account as part of an informed decision making process.
Enterprise Tax are specialists in asset protection, with specific experience in advising individuals and businesses on cross-border strategies, where complex financial arrangements exist both in the UK and overseas.
Asset protection is necessarily complicated, as most people’s tax affairs are generally becoming, and you are advised to seek legal advice as well as tax planning expertise.
We can advise on asset protection strategies to help protect your personal assets. Our services include:
For more information, please contact one of our Chartered Tax Advisers.