Duke of Westminster and IHT – a tragedy from all perspectives

Writen by Lynne Rowland, private client tax partner at Kingston Smith

THE death of Gerald, Duke of Westminster is a tragedy on many levels.  He was a family man with a huge sense of duty, who managed his family’s affairs with discretion.

We have seen many headlines suggesting that the family are dodging IHT on his death estate.  As barely a few weeks have elapsed since his demise, no one knows the true value of his personal estate and the amount of IHT that will have to be paid.

His son has inherited the title, and may also inherit some personal wealth from his father, or be entitled to a capital payments from family trusts.  IHT would be due on such distributions. The bulk of the family’s wealth is tied up in trusts and trustees pay IHT, but not on the occasion of the death of a discretionary beneficiary.  The rate of IHT paid by trustees of discretionary trusts is a maximum of 6%, but that is charged every ten years on the value of the trust’s assets.  That tax charge is calculated to be roughly equivalent to the amount of IHT that would be charged on those assets on death if owned directly.  Due to the nature of the assets held within the Grosvenor family trusts, there would be claims for business and agricultural reliefs to reduce IHT charges, but those reliefs are also available to individuals who hold those types of  assets directly.

So where is the advantage?  From a family perspective, the primary motives behind holding assets within discretionary trusts are the ability to pass them from generation to generation, with each generation being the custodian rather than the owner of those assets; also, the assets are protected from divorce or impropriety as they are owned by the trustees and not the beneficiaries. Tax payable on the ten yearly anniversaries can be onerous, and there is annual compliance, but it can be planned for, rather than the position that many executors face which results in them having to sell assets to pay IHT six months after the date of death when assets have been held directly.

The Grosvenor Estate is not just involved in property ownership in the UK, it is a diversified business that pays annual tax on its profits, the same as any other business entity.  Last month’s news also highlighted that IHT receipts have increased by over 20% in the last year, and doubled since 2010. It begs the question why more families are not using trust structures to enable them to manage a family’s wealth in a more organised way, to keep assets intact by being able to predict when payments of IHT will fall due, and ensuring that funds are available to make those payments.

Despite headlines that seem to suggest oterwise, IHT is not just a tax paid on death.  Lifetime liabilities can arise on the creation of trusts and on the occasion of anniversary and exit charges. IHT is consequently not just a tax paid by the less informed (as some headlines seem to suggest), but it is true that the more informed may not be charged to tax on death. Let us hope that these valuable asset protection vehicles are not made prohibitively burdensome or abolished in the desire to “simplify” IHT.