Inheritance tax is payable at 40% on estates worth £325,000 or more – but the family of one of Britain’s wealthiest landowners won’t be paying this charge following his death last Tuesday.
The Duke of Westminster collapsed while walking on his Lancashire estate and was flown to hospital where he died, aged 64. He had been a major-general in the Territorial Army but was a heavy smoker and was treated for lung cancer four years ago, leaving him in poor health. His estimated worth was £9.35 billion but the fortune was placed in a series of trusts, protecting it from the taxman. Consequently his estate will be subject to just a fraction of the £3.6 billion that would have been due, had he not exploited the legal tax loopholes that are available to anyone.
The Duke is succeeded by 25 year old Hugh Richard Louis Grosvenor, who will take over as the 7th Duke of Westminster and head of the trust which holds the family’s assets. Despite having two elder sisters, Hugh inherited both title and control of the trust due to the rule of primogeniture. Under this rule, the first-born son in a family inherits the entire estate. The application of the rule to the Monarchy was abolished in 2013, before Prince William and Kate Middleton, the Duke and Duchess of Cambridge, gave birth to their first child George. Had they had a daughter, she would have eventually been queen.
The new Duke’s fortune includes thousands of acres across Scotland and Spain, together with 190 acres in Belgravia. It also includes the Grosvenor Group property portfolio and Wheatsheaf which has investments in energy businesses together with food and water.
Over the years, the Grosvenor family have repeatedly taken full advantage of legal loopholes to avoid paying inheritance tax. The taxman challenged the second Duke after he paid his gardener £3 a week (about £191 in today’s money) via a deed of covenant to avoid surtax. The Duke won his case with the House of Lords stating that it was “every man’s right to order his affairs to reduce his tax bill by whatever legal means he found available”.
The 6th Duke transferred the family’s assets into trusts following Thatcher’s abolition of capital transfer tax on gifts in 1986, saving the family about £300 million in inheritance tax (about £600 million in today’s money).
Cutting your tax bill legally
Minimising your inheritance tax liability isn’t just for the wealthy – there are plenty of legitimate ways you can ensure less of your estate goes to the taxman.
The first £325,000 of your estate is free from inheritance tax. If you leave everything to your partner, no inheritance tax is payable on your death – and you can pass on your full unused allowance, giving them a total allowance of £650,000.
From April 6 2017, an additional family home allowance will be added to this threshold. During the 2017-2018 tax year, this will be worth £100,000, increasing to £125,000 in 2018/19, £150,000 in 2019/2020 and finally £175,000 in 2020/21. The allowance applies to the individual so effectively, by 2020, a couple will be able to pass on their estate, including a family home, up to the value of £1 million free from inheritance tax.
You can also gift up to £3,000 a year tax free, without the amount being taken into account when the value of your estate is assessed on death.
You can gift more substantial sums from your income free of inheritance tax, provided that (1) they are regular payments, (2) they come from your income and not your capital, and (3) they do not reduce your standard of living.
Additionally, you can gift unlimited sums of money or assets to anyone you choose, free from inheritance tax – provided that you survive for seven years following the gift. If you die between three and seven years after making the gift, inheritance tax is due at a tapered rate from 32% at 3 years to 8% at 6 years. If you die less than 3 years from making the gift, inheritance tax is payable at the full rate of 40%.
You can pass on your entire pension pot to your choice of beneficiaries free of from inheritance tax, provided that you die before the age of 75. Your selected beneficiaries will not have to pay income tax on any drawings. Should you die after the age of 75, the pot will still be free from inheritance tax, but the beneficiaries will be taxed at their highest rate on any drawings.
If you invest in Shares in Enterprise Investment Scheme (EIS) companies and some shares on the Alternative Investment Market (AIM), these may qualify for business property relief if they are held for at least two years prior to your death.
Finally, putting your assets into a trust can be a highly effective way to minimise inheritance tax liability. However, the rules on exemptions are complex and you should get a lawyer to set the trust up for you. Get in touch with our Later Life Planning team for more information.