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/ 12 Aug 2016

The Duke and the Taxman

With news in the last few days of the death of one of Britain’s wealthiest men, The Duke of Westminster, the media has turned its attention to the succession of his title and, more importantly, who inherits what?

It’s been reported that the late Duke’s son, Hugh Grosvenor has now inherited the title. So, it would be reasonable to assume this means he’s the oldest child? Perhaps surprisingly he is actually the late Duke’s 3rd child – there being two sisters older than him, Lady Tamara Grosvenor and Lady Edwina Grosvenor (who is married to the TV Historian Dan Snow). So how it is that Lady Tamara didn’t inherit the Dukedom?

It’s because of a very old rule known as Primogeniture which states that the oldest son shall inherit the land and titles of their father. The rule is most often associated with Royal Succession. If the Queen’s oldest child had been Princess Anne rather than Prince Charles it wouldn’t have changed the fact that Prince Charles is next in line to be King. However it is because of this very family lineage that the rule, since 2013, has ceased to apply.

This was done in order to ensure that had the Duke and Duchess of Cambridge’s first child had been a girl, she would have been able to take the throne. It was rightly acknowledged that it would have been improper to have maintained an archaic rule such as this in today’s era of equality. Unfortunately for Lady Tamara Grosvenor this change did not apply retrospectively – it is for births after 2013 and that is why it is her brother and not she who has just become even more fabulously wealthy.

But just how wealthy will the new Duke be? It has been stated that the recently deceased Duke had a fortune of £9.9 billion which has all passed to the new Duke. However whilst there is no doubt that by inheriting his father’s estate he would inherit a substantial fortune – surely it won’t be close to £10 billion – because what about inheritance tax ?

We often have to disappoint our clients by telling them about inheritance tax (IHT) as it does come as a surprise – and an annoyance that their hard earn cash and property can’t simple pass to their nearest and dearest upon their death. When a person dies there is an assessment of whether such tax needs to be paid. Currently if someone’s Estate is valued at exceeding £325,000 then in most circumstances inheritance tax is due.

The figure of £325,000 is the current level set for the Nil Rate Band. This is the amount of money that HMRC do not charge tax upon – anything over this is taxed at a rate of £40%. George Osborne announced in the last Budget further possible savings on inheritance tax , by way of an additional Nil Rate Band, that are due to start in April 2017. However you need to fit eligibility criteria to be able to benefit from these new provisions.

You don’t have to be a mathematician to see that the late Duke’s Estate was worth considerable more than the current Nil Rate Band and therefore it would be reasonable to expect that the Estate will have to pay a substantial amount of tax.

In most peoples’ circumstances paying the tax bill means selling off assets. We most often see this in the form of children selling the family home to pay off the IHT when their parents have died.

However the Sun Newspaper, on 11th August reported that despite leaving £9.9 billion to his only son, the Estate of the late Duke of Westminster won’t be paying anywhere near the £3.6 billion that would be expected.

It does seem that historically the Duke of Westminster has been treated rather favourably under tax laws and court judgments but the basis for the substantial savings in inheritance tax seems to come from the use of trusts.

Trusts are legal devices that enable ownership of an asset to be held and managed by trustees who are the legal owners of the asset but most often ‘hold’ the asset for the benefit of someone else.

The most common, and simple example of a trust would be a trust for the benefit of a minor. One might often create such a trust either whilst alive or within their will which states a certain amount of money shall be held ‘on trust’ for their children until they reach a certain age – often 21. This means that this money is for the benefit of the child but is not actually ‘owned’ by them until they reach a certain age – and when they reach this age the trust ends and the money is given to them outright. However whilst the trust is in place the beneficiary can benefit from the money – such as having their school fees paid or the occasional advancement of some of the money. This is most often used by parents who leave money to children who aren’t adults – but also wanting to ensure that when they become an adult at 18 they don’t suddenly come in to lots of money.

How this applies to the Duke of Westminster and all his wealth is not immediately clear. Wealthy people do pay tax and tax evasion is illegal. Avoiding tax is not illegal.

Therefore, with the late Duke being in the public eye and the transfer of the Estate being subject to public scrutiny we can probably assume that what he has done is entirely lawful.

It is likely that the late Duke didn’t actually ‘own’ much of the assets that make up his massive fortune. Much of his Estate will be his property portfolio which included huge swathes of some of the most expensive properties in London. These properties are unlikely to have his name on the land register/deeds but in fact are likely to have the name of a trust corporation or a company.

These trust corporations will then have trustees who are responsible for the management of the trusts and for how it benefits the beneficiaries.

These kinds of arrangement would mean that when the late Duke’s executors are sitting there with their calculators out and a room full of accountants and lawyers they will probably be stating on the inheritance tax forms that in actual fact the late Duke didn’t actually own much property – despite being considered one of the wealthiest landowners in the country.

As a Firm we will be able to advise you on whether there are any steps that would be beneficial to your individual Estate tax planning needs, and advise you upon whether, and how, you can benefit from the new Nil Rate Band from April 2017.

By Michael Brierley, solicitor in the Wills, Probate and Trusts Department

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