Target Audience

 

Singapore-based expats, specifically:

1.     Any Non-US domicile person owning shares of US-listed companies worth > US$60,000

2.     Any Non-UK domicile person owning shares of UK-listed companies worth > £325,000

** domicile: the country that a person treats as their permanent home, or lives in and has a substantial connection with.  For most purposes, you can consider domicile to be your country of birth e.g. most British expats living offshore will still be “UK-domiciled” in the eyes of the UK tax authorities, even if they haven’t lived in the UK for decades.

The High-Level Problem

 

As the rather depressing saying goes: “nothing is certain in life, but death and taxes”. The combination of these unfortunate two events is known as “inheritance” (UK) or “estate” (US) tax (i.e. a new tax liability, becoming payable after death). This article will highlight a couple of solutions by which an individual can legally avoid the latter if the former happens. In both of the scenarios described above (UK and US) the rate used to calculate liability is a substantial 40%, applied to assets valued above the following thresholds:

  • US: US$60,000
  • UK: £325,000

The US estate tax threshold is particularly worth noting, as a lot of investors may unwittingly fall into this tax trap simply by owning any US-listed shares which have performed well over a number of years.   Besides the sizeable expense of this tax liability, it’s worth noting that its timing can also be troublesome; often forcing a hurried sale by the deceased individual’s beneficiaries to raise the necessary cash in time:

  • US: estate tax return due date is generally within 9 months after death.
  • UK: inheritance tax payment due within 6 months after death (after which it becomes subject to interest).

Often, sadly, this results in an unwanted sale of a family home to cover the tax liability; not an experience that any grieving relative should have to go through.

US Estate Tax Examples

 

  • Sarah, a Canadian national, owns US$200,000 of Apple shares.  On death, her estate tax liability is:
    • 40% x US$140,000 (the value of the holding that exceeds the US$60,000 threshold) = US$56,000.

 

  • Peter, an Australian national, owns US$35,000 of Amazon shares, US$40,000 of Microsoft shares and US$55,000 of Facebook shares.  On death, his estate tax liability is:
    • 40% x US$70,000 (the value of the combined U.S. shareholding that exceeds the US$60,000 threshold) = US$28,000.

 

UK Inheritance Tax Examples

 

  • Pierre, a French national, owns £500,000 of Glencore shares.  On death, his inheritance tax liability is:
    • 40% x £175,000 (the value of the holding that exceeds the £325,000 threshold) = £70,000.

 

  • Helen, a German national, owns £100,000 of Aviva shares, £150,000 of Barclays shares, and £200,000 of BP shares.  On death, her inheritance tax liability is:
    • 40% x £125,000 (the value of the holding that exceeds the £325,000 threshold) = £50,000.

 

Two High-Level Solutions

 

  1. A Life insurance policy is taken out by the individual to cover the expected tax liability in case of death. Obvious limitations of this approach are that:
  • The tax liability amount insured for is fixed at the time of the policy creation, hence assumes that:
    • the value of the shares will not grow further (if it does, then the coverage becomes insufficient to cover the future liability), and
    • further qualifying shares will not be bought/sold between now and the individual’s death (as, again, any changes in the value will require an adjustment in the life insurance cover).
  1. An Offshore portfolio bond is created under the individual’s ownership and the shares are transferred into that bond, effectively ensuring that the individual is no longer recognised as the owner of the shares from a UK inheritance tax or US estate tax point of view.

 

Conclusion

 

Of the two approaches described, the offshore portfolio bond is clearly the more effective and flexible option, so is the option worth exploring for anyone who is looking for a solution to this issue.  As always, a detailed look at the individual’s circumstances is recommended, along with specific tax advice, in order to verify that this solution is a good fit for that individual’s unique needs.

 

 

Michael Davidson is a Singapore-trained and qualified Financial Adviser with Global Financial Consultants Pte Ltd providing specialist financial advice and portfolio management services to international and local professionals in Singapore.

Book a complimentary consultation here.  Please quote reference “617IHT”.

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*Please note that Michael Davidson is not a tax specialist or accountant and that none of the content outlined here should be taken as personal advice. You should consult your tax specialist and financial adviser to review your current financial situation and futures goals to consider whether this strategy is appropriate for you.  I expressly disclaim all and any liability to any person or organisation, in respect of anything, and of the consequences of anything done or omitted to be done by any such person in reliance, whether whole or in part, upon the whole or any part of the contents of this article.