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A Tried and Tested Expat Inheritance Tax Solution

In the past we’ve written extensively about why expatriates should make the effort to have a will in place – a large driver behind this very fact is that for the majority of Britons living abroad, there is not only the British taxman waiting in the wings to see what he can take from an estate, but there’s the taxman in the expatriate’s new nation of choice as well.

Just because you become resident in a new country when you expatriate, that doesn’t mean you change your nation of domicile – and all Brits domiciled in the UK are potentially subject to IHT on their worldwide estate upon death.  What’s more, the rules relating to IHT differ from nation to nation – and you may be living in a country where the local taxman also has an interest in your worldwide affairs, and where the laws of succession are very different to what you would want or hope.

You may think if you die without a will it doesn’t matter as your spouse and children will inherit anyway – but that may very well NOT be the case, depending on where you’re living when you die.  So, there are many reasons to get a will in place…but a will cannot protect you and your beneficiaries from inheritance tax.  However, a relatively newly explored solution is becoming more and more popular for those expats who want to secure their wealth for future beneficiaries.

How Can Expats Legally Avoid IHT?

The tried and tested expat inheritance tax solution we’re talking about is not the good old trust – which comes with all sorts of negative headaches and issues, not least of which include cost and complications – but an FIC.  FIC stands for family investment company – and these are tools in a British financial adviser’s armoury that are equally beneficial for expatriates living abroad.

Your local adviser in your new nation may never have heard of them however, and even international IFAs can be a little uncertain as to their application – so allow us to explain them to you clearly, so that you can then explore FICs to see whether they would indeed be beneficial for your own personal circumstances.

FICs are also referred to as common law foundations and at their most basic they are a simple company structure limited by shares – and as a result they are hugely flexible and malleable to each individual’s requirements.

How Do Family Investment Companies (FICs) Work?

A company can be limited by different types of shares: you can have shares that give a shareholder the right to vote and control the company, and you can have shares that give the shareholder the right to receive an income from assets in the form of dividends.  Additionally, you can have shares that give the shareholder the right to the capital and the underlying assets owned by the company.

You can have shares that carry all rights or a division of any of the rights – what this means is that you can divide the rights up between shares, apportion shares to different beneficiaries depending on how you want them to literally benefit from your estate, and in so doing you do not have to give away ownership or control as you do with a trust.

If you were to consider setting up an FIC for your family and your estate it could work in the following way for example: –

An Example Structure

You and your spouse could have the voting shares so that you retain control of your estate, and your shares could also give you the right to take an income from the company…so that your lifestyle is maintained.  The so-called ‘capital shares’ could be given to your chosen beneficiaries immediately – and ideally this will occur at least seven years before your death – therefore potential inheritance tax charges in the UK are likely to be significantly reduced.

What’s more – and this is perhaps as great an additional benefit – you have tidily collated your estate’s entire significant assets when creating the FIC structure, therefore when it is time, your executors have a much easier job of handling your estate according to your will, and probate is significantly reduced, which can be a real burden reduction for surviving family members.

Ultimately, the key to an FIC is that because a company never dies, inheritance taxes that are payable upon death can legally be avoided!

Hybrid companies, and structures limited by guarantee can refine your options further.

Limitations of FICs

It’s worth noting that the establishment of such a structure does not necessarily remove all potential tax charges such as income and capital gains taxation however, what’s more, the establishment of such a structure does not remove your requirement for a will either.  You may have personal bequests you wish to make, you may also need to ensure that your affairs are correctly managed by a will that is legally binding in your new nation of choice – as well as in the UK…but all in all these are hugely flexible and massively potentially advantageous structures for resident and non-resident Britons.

How You Can Find Out More

If you want to explore FICs further, or you wish to explore inheritance tax reduction options but you do not have access to a suitably qualified adviser, please do contact us and we will endeavour to put you in touch with a reputable company that can advise you accordingly.

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