In 1987 I was invited to be a contributor to the weekend Financial Times because their journalists were not sufficiently knowledgeable about tax to write about it.
Reading the nonsense written in the papers about the non-payment of inheritance tax by the Duke of Westminster on his £9.9billion estate, makes me think that nothing much has changed.
To give some quotes; the Observer ‘For the Grosvenors the 40% death duties incurred by normal estates do not apply’ – based on what?
The Guardian ‘’Money can stay in the trust and cascade down from generation to generation and nobody pays inheritance tax on it’ – huh?
Money Week ‘we have long argued that inheritance tax should be fundamentally reformed so that the tax is not levied on a deceased person’s estate but on the income gifted to the beneficiaries.’ What sort of revenue would this produce?
The Observer talks about a campaign to call for beneficiaries to be named on a public register of family trusts and to publish annual accounts, and says ‘the argument for transparency has surely been won’ – Does the Observer genuinely believe that family trusts in the UK are engaging in some skullduggery that needs to come to light?
The articles talk about discretionary trusts as not being ‘owned by anyone’ so that wealth can pass from one generation to another tax free. This is simply not the case. Inheritance Tax is payable at 20% when the trust is set up and at 6% every 10 years, which means that after 40 years the trust would have paid 44%. Furthermore, trusts in this country cannot last forever, the average time is about 100 years. However, in other jurisdictions trusts can go on forever and can skip the 20% charge on set up.
If I were advising the Grosvenors – which I am not, I would not use discretionary trusts other than for assets which are 100% exempt from tax; agricultural land and relevant business property.
However, the land in Mayfair and Belgravia do not qualify for business property relief or agricultural property relief, so I would suggest that these assets are held in an ‘interest in possession’ trust for his eldest son Hugh.
The term ‘interest in possession’ means that Hugh is entitled to all the income which arises from the land. However, this does not mean that Hugh gets paid all the rent from Mayfair and Belgravia. If the land is owned by an investment holding company the Directors can decide whether or not to pay dividends, if no dividends are paid Hugh would receive nothing. The company would of course pay tax on all the rental income it receives but the rate of this is about half what Hugh would pay if he received this money direct.
The problem with an interest in possession trust is that Hugh will be treated for inheritance tax purposes as if he were the owner. Therefore, if he were to die unexpectedly, then Inheritance Tax at 40% will be payable on all the land in the trust. Given that Hugh is only 25 this can easily and cheaply be covered by insurance.
As soon as Hugh marries and has a child, then this trust will be moved by the trustees on to the next generation, and provided Hugh survives seven years it will pass free of tax.
The calling for a public register of all trusts and beneficiaries, raises concern that in some way these elite aristocrats are above the law and that journalists need to be able to expose this mischief. The fact is that these families are bound by the same laws as everyone else. Where they differ is that they see themselves as custodians of their wealth; not owners. Most wealthy families, even with significant wealth see themselves as owners and are simply not happy to pass their wealth on to the next generation. They have a tendency to hang on to it until death is looming at which time it is too late to survive the gift by seven years.
The main advantage of having assets in trust, is that the trustees take the decisions as to when to pass the assets on to the next generation and often do so as soon as the next generation is born. Where the journalists go wrong is in thinking that the deceased Duke was worth £9.9 billion on his death. In reality he was probably worth little more than the £325,000 nil rate band, the rest was probably passed on to his son 25 years ago!