Inheritance Tax (IHT) can be an intimidating part of financial planning and easy to get wrong without the right information.

With the Government reporting that HMRC collected £7.6 billion in Inheritance Tax in the last tax year, more people are falling into the IHT bracket.

When dealing with estate planning, an offshore trust could be an effective way to protect your wealth and reduce your exposure to unnecessary taxes.

How can offshore trusts protect your inheritance?

An offshore trust involves transferring assets to a trustee in an offshore jurisdiction, who manages the finances and assumes legal ownership.

Offshore trusts provide a legitimate option to mitigate IHT liabilities, especially when foreign assets are involved.

For anyone who is UK-domiciled, IHT applies to worldwide assets and this can include overseas property, investments, cash and business interests.

With IHT being charged at 40 per cent on the value of an estate above the £325,000 nil-rate band, poor estate planning can lead to a significant portion of your wealth being lost.

When drafted correctly and for legitimate purposes, offshore trusts can be an important part of your asset protection and ensure long-term tax efficiency.

How to create an offshore trust?

Before taking any steps, you must define what you want your offshore trust to achieve and how these objectives will inform your decision-making.

For many, a trust may be used to reduce IHT, protect assets from litigation or divorce, manage overseas property or investments or ensure your wealth is distributed gradually to beneficiaries.

Choosing the right trust structure for your finances is important as it determines how your trust operates and how this will be managed.

The types of offshore trusts include:

• Discretionary trusts – Trustees decide how and when the beneficiary receives assets, providing flexibility and stronger asset protection.
• Life interest trusts – A named beneficiary receives income throughout their lifetime, while capital is preserved for future beneficiaries.
• Fixed trusts – Distributions are predetermined and offer certainty and clear expectations for all beneficiaries.

How to choose the right jurisdiction and trustee?

Jurisdictions are central to the effectiveness of an offshore trust and common locations include the British Virgin Islands, Guernsey, the Isle of Man and the Cayman Islands.

When selecting a jurisdiction, you should consider its political stability and track record in managing international trusts.

After you have decided on a jurisdiction, you must appoint a suitable trustee who is responsible for managing your assets and acts in the best interests of the beneficiaries.

It is commonly advised to appoint a non-UK resident professional trustee to maintain your trust’s offshore status.

Trustees should also maintain detailed records and accounts and ensure compliance with UK and local laws.

Choosing a reputable trustee and jurisdiction can be difficult, but seeking legal advice early on can help you understand your options and what suits your financial situation best.

How to stay compliant when creating your offshore trust?

Despite being based overseas, offshore trusts must comply with UK tax laws and trustees and beneficiaries may have reporting obligations.

UK tax implications can include Income Tax and Capital Gains Tax and any income or gains acquired internationally, including from offshore assets, must be reported to HMRC.

Anti-money laundering regulations are also required through due diligence and failing to comply with any of these legal obligations can lead to penalties or the loss of expected tax advantages.

Offshore trusts can be overwhelming, but with our help, you can avoid unintended tax charges and ensure you remain compliant with UK legislation.

Why is legal advice important for offshore trusts?

Offshore trusts can offer long-term financial benefits, but ongoing oversight and regular reporting are required.

Our specialist team can guide you on selecting the right structure and ensure your trust deed reflects your initial intentions.

With expert advice, you can establish an offshore trust that is fully compliant and protect your inheritance for generations to come.

Contact our team for advice on estate planning and how to protect your inheritance and assets through offshore trusts.