Dominic is a successful executive, originally from Australia, who has an established career working for a multinational firm in the mining sector. A year ago, Dominic decided to retire, but he accepted a two-year consultancy role at the company’s London office on a part-time basis.
Dominic, aged 60, is joined by his wife, Laura, 54, who relocated permanently to the UK last year. They fell in love with the UK. They started to plan to retire there, upon the successful application of an ancestry visa to grant indefinite leave to remain and also give them British citizenship in the long term.
As a result, Dominic and his wife purchased a property in the UK worth in excess of £1 million. They have also retained properties in Australia, for their own use and as part of a buy-to-let portfolio, valued at approximately AUD 2.5 million (£1.4 million).
Dominic and Laura deposited approximately £800,000 in a UK bank. Dominic also still has a AUD 3.2 million (pension) superannuation fund, the cash value of his final salary superannuation fund from the time he worked in Australia.
Their adviser realised they were on a path to becoming UK-domiciled in a very short period of time. He explained the likely consequences in respect of inheritance tax (IHT).
Dominic and Laura understood that, from the date they emigrated to the UK and purchased a property, this new asset would be caught in the IHT net. But they did not realise this would extend to their Australian property portfolio.
In the event of their deaths, they would have to pay Australian capital gains tax (CGT) on their Australian estate, in addition to UK IHT at a rate of 40%. Their adviser recommended they keep their options open, including the possibility of a future return to Australia. They were therefore advised to keep their will unchanged, while their intended place of burial should remain in Australia.
They were advised to postpone their ‘ancestry’ visa application for at least another year and only make a partial withdrawal from Dominic’s Australian superannuation. This would enable them to retain their Australian-domiciled status for long enough to sufficiently manage their taxation affairs.
One of the most important pieces of advice was to not transfer over any cash from Australia to the UK as a result of the superannuation partial withdrawal. The adviser recommended they retain AUD 1.25million (£692,000) in Dominic’s superannuation in the event of a late retirement and return to Australia.
As non-UK domiciles, they can arrange their excluded property to be owned by excluded property trusts. Used to protect investments held outside the UK while individuals are non-UK domiciled, such trusts allow for the assets owned by the trust not to be liable for UK IHT on their deaths; even in the event their domiciled status may change in the future and they become UK domiciled.
At their discretion
The clients were advised to transfer their entire Australian property portfolio to an Australian discretionary trust. Subsequent costs would include Australian stamp duty at 5% and a small Australian CGT charge.
It was also proposed Dominic withdraws AUD 1.9 million from his Australian superannuation fund as a lump sum, together with their offshore cash, to be settled into another property-excluded trust and invested. The lump sum withdrawn from the Australian superannuation fund is not assessable for UK income tax, as it is paid in respect of overseas service pre-6 April 2017.
Property excluded trusts are not subject to the 10-year periodic IHT tax. Settlers can also be beneficiaries of the trust as the UK rules around gifts with reservation of benefits do not apply for property-excluded trusts.
Eugen Neagu is head of financial planning at Montfort