How to plan your estate in the style of the Duke of Westminster
Gerald Cavendish Grosvenor, the Duke of Westminster, died unexpectedly last week leaving a fortune of approximately £8.3 billion. Tax – and the alleged avoidance of it by wealthy individuals – has been an almost ubiquitous feature in the press of late. As such, the Duke's sudden demise was accompanied by many sensationalist and provocative headlines accusing him of avoiding a hefty inheritance tax bill. This is, in fact, not the case: it was not nefarious scheming at work here, but shrewd and, I hasten to add, legitimate tax planning.
It should be remembered that the Duke was never in line to inherit the estate. An aspirational beef farmer, it was only when his uncle died without heirs, that his father Robert received the title and fortune, which Gerald would receive when he was 27. Similarly, Hugh Grosvenor will now inherit the estate at age 25 but like his father, it will not be his to sell or spend just to safe keep for the next generation.
How the Duke's estate was planned
Since 2009, the inheritance tax nil-rate threshold for an individual has been £325,000 or £650,000 for a married/civil partnered couple. In certain circumstances the residence nil rate band extends this to provide an additional £175,000 per individual or £350,000 for a couple on the family home passing to descendants. The aggregate value of any assets which exceed this figure are taxed at 40%. How, then, has the third richest billionaire in the UK managed to legally circumvent what – on the face of it – should be an enviable cheque to HMRC?
The reason is the clever use of trust structures, which means that assets do not form part of his estate. Under a trust, the trustees are the legal owners who are responsible for managing the trust, but not the beneficial owners.
The form of trust that the Duke most likely used, would be a discretionary trust. Under a discretionary trust there is a class of potential beneficiaries and the trustees can choose who within that class benefits, how much and when. Until a decision is made by the trustees to pay funds out of the trust to a beneficiary those funds do not form part of the beneficiary's estate. Assets can stay in a trust for generations.
Discretionary trusts are subject to inheritance tax charges every 10 years and to 'exit charges' when funds leave the trust between those periods, but the maximum rate of tax is 6%, a lot less than 40%.
Even if you are not fortunate enough to rank in the list of British billionaires you may still benefit from setting up a trust either in your lifetime or under your Will. Trusts can ring fence assets and help protect them against being used to fund nursing home fees, preserve a person's disability benefits, protect against the modern danger of a child divorcing or a spendthrift child.
Astute Will and tax planning in your lifetime can help to ensure that your loved ones are not left with a substantial inheritance tax liability upon your death. Please contact a member of the Succession & Tax team for more information on the use of Wills and trusts.