"Inheritance" / Distribution from a foreign trust - confused

[SanchoPanza]

Hello All

I wondered if anyone might be able to help me.

My father died last year leaving some investment policies in Jersey. He was not domiciled in the UK.
The policies were written into trust in favour of my mother unless she should predecease my father (she did) and then for the benefit of my brother and I in equal shares.

I am domiciled in the UK and my brother in Hong Kong.

The trust was not something we were fully aware of and we had instructed a Jersey law firm to apply for a grant of probate (which they have obtained and which the investment provider required). The investment provider had originally told us that they would release the funds to our Jersey lawyers as part of my father's estate upon provision of a death certificate showing that my mother had also died. Since my father was not domiciled in the UK there would have been no UK inheritance tax.

Nothing has actually been distributed yet as they are requiring further paperwork, but they are now saying that the Executor (the Jersey Law Firm) must keep the proceeds of the investment separate from the estate - i.e. it cannot be treated as inheritance. The investment provider is considering the Executor as a "constructive trustee" and so I assume that any distribution they make would be as a distribution from a foreign trust.

This has thrown me into a bit of a spin and I am really struggling to work out the potential consequences of this. My initial research suggests that this could be a very bad thing from a tax perspective, which is something I can ill afford right now. The Jersey lawyers have not provided much assistance since it will not be a Jersey issue. At present all is on hold until I can work out what to do.

I will be seeking advice in the UK (and my brother may need to do the same in Hong Kong) but I would be most grateful if anyone had any thoughts they could share on this at all that might point me in the right direction - whether they are familiar with a similar situation and/or what might be done to mitigate any potential tax liabilities ?

Thank you very much

[AGoodman]

This doesn't sound like it should be too complicated but it is difficult to help without sight of all the documents. In particular it is difficult to work out why it has apparently become so convoluted.

The main point that springs out at me is that if the policies were written into trust, no probate should be necessary. Usually, once you have provided the death certificates (and some ID) to the trustee, the monies should be paid to you and your brother as beneficiaries. The monies do not fall into the estate and so the executor and probate have nothing to do with it.

One reason may be that your father and mother were the sole trustees, in which case the Jersey executor(s) would become the new trustee of the policies or have the power to appoint a new trustee.

I would not normally expect any tax consequences to arise from this unless your father had been making large premium payments during the last seven years of his life. It is absolutely correct that the monies should be kept separate from estate monies as the whole point of the trust is to prevent the monies falling into the estate where they might suffer IHT.

Can you confirm who was named as trustee under the original trust document?

[SanchoPanza]

Thank you very much indeed for your reply. Yes - this has become really convoluted.

It was the investment provider that told me I needed a Jersey grant of probate and told me that the funds would be distributed as part of the estate - which I think would have worked well for us.

The trust document (governed by English law) that I have been sent says the following:

"I (i.e. MY DAD) wish to effect the contract in respect of this Proposal as Trustee in accordance with the trusts set forth below.

1. Any proceeds of the contract and the policy when issued and any proceeds of thereof shall be held by the trustees (which includes myself while a trustee and all other persons (if any) who from time to time and for the time being shall be trustees thereof).

UPON TRUST

a) as to any sums which may become payable by reason of my survival to the Benefit Date (DAD DIED BEFORE THIS) for my own benefit absolutely it hereby being declared that as Planholder I shall be the only person entitled to exercise the Options to be contained in the policy and shall be under no obligation to give notice of such exercise to the trustees hereof and my receipt as Planholder for any such sums shall be a sufficient discharge to the INVESTMENT PROVIDER.

b) as to any sums which may become payable by reason of my death before the Benefit Date for all or such one or more exclusively of the others or other of any person whom I may at any time have been married my children whenever born my grandchildren born during my lifetim

One reason may be that your father and mother were the sole trustees, in which case the Jersey executor(s) would become the new trustee of the policies or have the power to appoint a new trustee

[THERE IS A GAP]

and any other person or persons (other than myself) whom I may nominate in writing to the trustees and in such shares and for such interests as I may as Planholder by Deed or Deeds revocable or irrevocable appoint and in default of any such appointment or for so far as any such appointment shall not extend for

[AND THEN WRITTEN IN HAND UNDERNEATH THIS BY MY FATHER]

My wife XXXXXXX unless and until she shall predecease me and then in that event for such of my children whenever born as shall survive me and if more than one in equal shares and if none for the absolute benefit of the last such child to die

[A BIT MORE GUFF RE THE POWER OF TRUSTEES ETC. BUT DONT THINK THIS IS RELEVANT]

SIGNED: MY DAD"

There is also a separate Deed of Appointment (Trusts for New Policies) which was signed by my Dad as appointor and sole trustee appointing my Mum as a "New Trustee" (although it appears incomplete - it does not seem to be dated and lacks the policy numbers that should be inserted.

I really have no idea as to how to manage this now.
As you might have guessed, my knowledge of these matters is limited to say the least !

[maths]

Assuming non-UK domicile status for your father, then the settlement of non-UK policies on a non-UK trust gives rise to excluded property ie trust assets not within the charge to UK IHT.

As AG states the position seems relatively straight forward. Policies are trust assets and form no part of father's estate. Hence, outside probate re father's estate.

It would seem in fact that on mother's death (and pre father's death) you and brother became absolutely entitled to the trust assets (ie policies). You could thus have requested the trustees to hand over policies to you/brother. In any event, on mother's death trustees then held policies as bare trustees for you/brother.

On presentation of father's death certificate to life office then proceeds should be paid over to you/brother or the trustees who then hand over proceeds to you/brother.

[SanchoPanza]

Thank you - I think my worry is whether there would be any tax (other than IHT) that I might be liable for in this instance. My basic worry is how I get the cash out of Jersey and into (in my case) the UK without suffering a significant tax hit. I assume there would be some form of tax (income ? CGT ?) that would be payable if I were to receive a lump sum into my bank account here in the UK.

Thanks again for your thoughts
Very much appreciated

[maths]

It would seem in fact that on father's death (which occurred after mother's death) you/brother became absolutely entitled to the trust assets. You could thus have requested the trustees to hand over policies to you/brother. In any event, trustees from that date then held policies as bare trustees for you/brother.

If this is correct then you are exposed to an income tax charge on your share of any gain arising on the death of father (I'm assuming the investment is a non-qualfiying single premium; life policy ?) assuming you are UK resident. Your brother will not be subject to any such UK tax charge.

There is no remittance basis applicable even though you are non-UK domiciled

[SanchoPanza]

Thank you

This sounds bad. The "gain" I assume would be the fulll amount I am entitled to ?
It is just over the iht threshold so had it been an inheritance I would have had a liability of 40% on the portion above the threshold but this would be 40% of the whole amount....?

[SanchoPanza]

A bit of further research seems to suggest that I am a bit stuffed and that there will be income tax payable at least on my half of the "gain".
This seems a little harsh given that the amounts involved would not have incurred IHT, but I suppose it is what it is.

It is not really clear to me how this would pan out, but using hypothetical figures it seems like it might be something like:

Assuming:
- an initial investment of 100 in 1991, surrender value of 500 in 2017 (and no withrdrawals, activity at all in that respect during that period)
- the investment is a non-qualfiying single premium; life policy (although not 100% sure, I think this is the case).
- brother and I beneficiaries 50/50
- UK law would apply to my "income" and Hong Kong law to my brother's

UK Position
The "gain" would be taxable as income for me. I am current a higher rate taxpayer earning £108K.
I am not sure how the gain would be calculated but assume it would be:
Final value of my share of gain minus initial investment. i.e. Total "Gain" is 400, so it would be 200 minus 100 = 100. And this 100 would be taxed at 40%.

Hong Kong Position
?
It seems like this might be anything from no liability at all for my brother's share to 17% of the whole amount of £250. We would need someone to look into this for us.

I suppose this is a lesson to keep up to date with your investments. The irony is that if this had fallen under the estate and been subject to inheritance tax, nothing would need to be paid at all.

[maths]

Chargeable event gain is surrender value immediately before death less total premiums paid. 50% of which would seem to be yours.