Planning necessary for wealthy clients with offshore assets

Financial advisers have an opportunity to add additional value to the advice they provide to their clients and, through careful financial planning, clients could save thousands in tax. With more clients taking steps to organise overseas assets, demand for advice looks set to increase.

Once assets become regularised, they become visible to the UK authorities, so clients will need to report every year via their tax return and pay tax on an arising basis.

Advising clients on restructuring their overseas assets (for example, into an offshore bond wrapper) can help mitigate or reduce the tax and reporting burden ensuring the assets become more efficient to manage.

The next consideration is to mitigate any tax exposure and help protect the client’s assets for their beneficiaries.

Clients often believe that money held offshore will not fall into the UK IHT net, however, this is not correct. While assets held offshore have always been subject to IHT, these assets were not necessarily visible to the UK authorities and hence not always disclosed. This is changing as new disclosure requirements take hold. These assets will become visible and completely open to scrutiny.

This could severely impact estate planning for some clients as UK IHT is set at a substantial flat rate of 40 per cent. Although clients do have an IHT allowance of £325,000, this is fixed until 2018, so will decline in real terms, and for many, this level is already insufficient to cover their main home let alone other investments.

Placing an offshore bond into a trust can help reduce this IHT liability and help protect the client’s wealth. Trusts can also ensure the right people get the right proportion of assets at the right time, helping with succession planning, and can enable funds to be paid out on death without any delay as the need for probate is removed.

There is a full array of trusts available in the market and good examples of trusts to use could include the discounted gift trust and loan trust. Choosing a provider with a full range of trust options will help ensure the client’s needs are fully met and assets are placed within the most efficient trust wrapper.

Using a professional trustee service will enable delegation of the administrative and legal burden of running a trust to a professional, providing reassurance that their trust is being administered appropriately.

Clients with assets held offshore are typically wealthy clients with significant sums to invest. These clients are in greatest need of wealth planning, especially when they take the necessary steps to organise their assets.

Steve Lawless is global head of banking distribution at Skandia

IHT: What the experts say

Jeremy Pearson at Canada Life comments on the continued Inheritance Tax (IHT) threshold freeze at £325,000 until 05 April 2018:

“The nil rate band (NRB) was set at £325,000 in April 2009 but if it had been inflation-linked it would be £372,000. With this move, the UK Government has cost IHT payers £18,800 each.”

Paul Latham, managing director at Octopus Investments on the latest figures from the ONS on inheritance in Britain:

“The ONS figures show there is a need to have efficient IHT planning solutions. With the value of property and shares in estates increasingly pushing their value over the nil rate tax band, effective IHT planning is a mainstream financial planning requirement.