How can I avoid inheritance tax?

Trying to find ways to avoid Inheritance Tax (IHT) has become an everyday question in recent years. IHT avoidance is largely driven by the property market over the last 30 years, now more and more people have assets over the thresholds and are trying to find solutions which genuinely might work. I can think of 3 options to give you some food for thought:

Emigrate to a jurisdiction where no inheritance tax is payable. This sounds a very attractive course of action – imagine retirement in the British Virgin Isles or a similar tax haven. However there are a few issues that need to be considered. First and foremost, you have got to break your links (technically called “domicile”) with the United Kingdom. Oh but once you have done that, any assets you still have in the United Kingdom will still be subject  to inheritance tax, so this means that you not only have to remove yourself from the United Kingdom, but also any potentially taxable assets. 

 Establishing domicile outside of the United Kingdom is not just a case of moving overseas. You have to be away for a minimum of five years and there are limits on the visits that you can make home once you have established your domicile in another jurisdiction. You have to be very careful not to re-establish your domicile in the United Kingdom, as returning to live in United Kingdom even on a temporary basis could re-establish your UK domicile and it will be much more difficult to get rid of it a second time. 

 Assuming the idea still attracts you, there are some other issues that you must not forget about. Are you going to be able to afford to pay for health care in old age if you are living in another jurisdiction where you may not have been a taxpayer for all your life? What about your family ties? Will you get homesick? It is not uncommon for people who emigrate to find that they become best or lonely and seek to return to the United Kingdom. Once you have overcome these issues, welcome to the joys of no Inheritance tax!

 Moving your assets out reach of HMRC
You could move all your assets offshore, perhaps holding everything in nominee names or in offshore companies. For the less sophisticated, you could try using aliases to hold your assets and give all your assets to your children and rely upon them to fund you. Which is all well and good, but these tactics take you along the same path as organised crime and the money laundering fraternity.

 Add to this the fact that to make this sort of tactic work, you have got to do it many years in advance leaving yourself open to investigation by the police or the Inland Revenue during your lifetime.

 So it looks as though this sort of tactic might well leave you avoiding inheritance tax but instead you or members of your family could end up in prison – probably not the best option!

 Going skiing
To the uninitiated, skiing stands for “Spending kids inheritance”. Of all our sure-fire tips this is probably the one that stands most chance of success and with luck it will also be great fun! 

Of course as with all attempts to avoid tax, there still remain a few problems. The biggest of which is how can you be sure that you will have enough money to live on without falling foul of one or more of the inheritance traps that await the incautious. For example, where will you live if the intention is to have nothing of value when you die? The answer here might be to take out an equity release on your house so that it reduces the value substantially during your lifetime.   

Another thing to do might be to invest large capital sums in annuities. These will pay you an income for the rest of your life but may not be popular with the kids when they see your capital disappearing into an insurance company. If you have a self-invested pension fund (SIPP), you could probably draw the income from this and even draw down on some of the capital. Under the current law, money left in a SIPP at your death can pass to members of your family free of inheritance tax, provided that it remains within a pension environment. This will probably endear you a bit more to the children. 

Of course as well as enjoying your self on all those world cruises and trips to the skiing lodge in the Alps, you could give lots of your money away to the children; provided you live for seven years and the kids remember to help you with the odd bill, this will also help your estate pass tax free and will be an incentive for them to look after you in your dotage.

The above is a slightly facetious way of avoiding inheritance tax, although it may surprise readers to know that all of these ideas are periodically mentioned to us.   Quite how serious the people who mention these tactics are, is difficult to say. It used to be said that inheritance tax was a voluntary tax, and the only people who paid it with those who either want to pay it or were too stupid to find ways to avoid it!  Sadly that is no longer the case, successive governments of different political colours have sought to make the avoidance of inheritance tax more and more difficult.  Their more recent weapons are such things as DOTAS (Disclosure of tax avoidance schemes) and the GAAR scheme (the General Anti-abuse Rule) which make it virtually impossible for any reputable professional to participate or market any scheme which is perceived as the slightest bit aggressive.  On top of this there is now high level of reporting between many different countries of the funds and deposits that are held by non-citizens, even the Swiss participate in this!

However notwithstanding this constant attack on the taxpayer they do remain a number of legitimate routes for reducing or mitigating inheritance tax.   At Herrington Carmichael we have been giving clients effective and safe advice for many years,  in addition we have contacts with other professionals who can advise if ever we are unable to assist.  For further advice on less controversial sure-fire advice on how to mitigate you Inheritance tax bill contact the Private Clients team.


Graeme Black
Partner, Private Wealth & Inheritance
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This reflects the law and market position at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought in relation to a specific matter.

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