Changes to the UK Finance Bill (No. 2) 2017: What they mean for Malaysians

Posted on Posted in Estate Planning, Investments, Penang, Retirement, Tax, Wills

What an exciting couple of weeks it has been! I got a few challenging wills signed off and advised on some complex structures for Malaysian families with UK ties.

I also wrangled invites to several estate planning seminars held by private banks, and topped it all of with a quick visit to Monaco for a friend’s wedding and a trip to Chiang Mai for my best friend’s 50th birthday.

Most of all, though, I’ve been waiting with bated breath for some clauses of the UK Finance Bill (No.2) 2017 to be reinstated. These were dropped from the original UK Finance Bill 2017 because of the UK elections.

I’m pleased to say that it now seems that these clauses will be readopted into the second UK Finance Bill 2017. There will probably be some minor amendments when Parliament comes back after the Summer recess, but I do hope clarity will be restored after this.

Once the clauses are passed, I will review them and update you with my final perspective on how it will affect you as tax payers.

But for now, you may be wondering …

How will this affect Malaysians owning properties in the UK?

One big way this is going to impact Malaysians is the treatment of offshore trusts settled by non-domiciled settlors who have retained an interest (protections).

What does this mean in simple English? Basically, once this bill is made law, Malaysians (non-UK domicile) who have protected their UK property by setting up a company registered outside the UK or through a trust, but who remain the shareholders or ultimate beneficiaries of said trust, will be subject to UK Inheritance Tax when they pass on.

Ironically, this punishes those who took the trouble to set up these structures in the first place to shelter their UK residential properties from Inheritance Tax. The tightening of the law started on 1 April 2016 when offshore companies holding UK property became subject to capital gains tax.

Is this common knowledge?

Many Malaysians remain unaware of the upcoming changes. For example, I had dinner with a prominent Kuala Lumpur-based businessman a couple of weekends ago. I hadn’t seen him for quite some time, and we caught up for a meal on a “foodie” trip to Penang.

As is customary, he asked what I had been up to. I explained that I had been busy lately with some estate planning for friends who own properties in multiple jurisdictions. I also mentioned I was pleased to have recently signed off several wills covering those jurisdictions. It was a lengthy logistical exercise that had potentially saved my friends several hundred thousand pounds.

Nothing more was said on the subject until the next day. Apparently this businessman, as is quite often with many Malaysians, owned numerous residential properties in London. Having consulted with tax experts in the past, he was under the impression that he had addressed all potential tax issues successfully. So he’d mentally put these issues into the proverbial back room for storage.

Truthfully, if he were to pass on today, the value of his residential properties in the UK less £325,000/- would be subject to 40% inheritance tax. I did a mental calculation, and the amount he owed would have been staggering.

These structures must be reconsidered carefully to avoid an estate planning disaster. One reconsideration may be to de-envelope and look into a will redraft. Another may be to have a discretionary trust structure set up.

What is a discretionary trust from an inheritance tax estate planning point of view?

Without going into technical legal definitions, a discretionary trust is basically a flexible trust structure. The settlor (who creates the trust) appoints a trustee (who manages the trust and derives no benefit from its subject matter). The trustee looks after the subject matter of the trust (for example properties, company shares, money etc.). This is for the benefit of a class of people, called the beneficiaries.

As the name suggests, the trustee is given a large but not unrestricted degree of discretion in deciding how much income or capital should be distributed to the beneficiaries. And here comes the bombshell … to avoid tax implications, the settlor should not be the beneficiary as well!

Not surprisingly, this is a concept that few Malaysians can fathom. We want the convenience of distancing ourselves from our assets when it suits us. However, we want control over such assets at the same time. Discretionary trusts are currently popular in more advanced countries, where generations of family have used such structures for years.

As a start, perhaps Malaysians might consider carving out a small chunk of their assets for the benefit of their beneficiaries. This will still have the benefit of reducing their assets in the UK that are subject to inheritance tax.

I do hope this helps to demystify an area of law that is counterintuitive and has stumped many of my clients.

Disclaimer: All situations revolve around their own facts. You are advised to seek your own advice on the above matters. No warranties are intended on the above.

Author: Sam Choong

Sam Choong is a lawyer practising in Malaysia. His areas of practice include estate planning, wills and UK inheritance tax for expats residing or seeking to retire in Malaysia.

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