South Asians warned of hefty inheritance tax

SOUTH Asian families have been warned about potential hefty inheritance tax bills over their property portfolios.

Ahead of the chancellor Jeremy Hunt’s Autumn Statement on Wednesday (22), experts highlighted a lack of awareness among some first-generation British Asians about the tax rules on real estate.

The average property wealth of British Indian and Pakistani households in the UK is greater than the white population, according to a report from the think-tank Institute for Fiscal Studies last year. For Bangladeshi households, the figure was lower, but they still hold a greater proportion of their wealth in property than pensions.

Jasvir Singh CBE

Finance experts have urged propertyowning British Asian families to consider discussing trust funds or pensions with a specialist lawyer or accountant to avoid future inheritance tax (IHT) problems.

Jasmine Birtles, a personal finance expert and CEO of the website MoneyMagpie, said the entrepreneurial mindset tends not to think about tax as much as the accumulation of wealth, therefore it is no surprise that some first-generation south Asians have been caught up in IHT issues.

She told Eastern Eye: “Most of those I have met have built up wealth through property, although others have done it through a high-paid job such as medicine or law. It shows how useful it can be to get advice from an independent financial advisor and/or a tax accountant relatively early.

“My first thought when it comes to mitigating tax bills for inheritors of an estate is to give as much away as you are comfortable about early on. Not everyone wants to do this, but you can safely do so through trust.

“Trusts are complex products, so it’s best to do it through a specialist lawyer or accountant who can set it up in a way that keeps you comfortable, but cuts out some of the tax that your children will have to pay.

“Another thing to consider is putting as much of your wealth as possible into products that avoid inheritance tax. Pensions are one of those and you can put up to £1.25 million in one to cut down on the tax you pay and remove some of your estate from IHT when you pass on.

“It’s also worth considering investing in ancient woodlands as they tend to be exempt from IHT. Also, if you have some investments in the AIM index (Alternative Investment Market) they could be exempt from IHT if you have had them for at least two years before your death.”

Many Asian families who arrived in the UK in the 1950s, 1960s and 1970s built up wealth through small businesses before investing in houses and apartments.

Inheritance tax receipts rose to £7.1 billion in the year to April, up £1bn on the previous year. A freeze on IHT thresholds has kept the individual tax-free allowance at £325,000.

Dr Mamata Parhi is head of accounting, finance, economics & governance (AFEG) at the Faculty of Business and Law at the University of Roehampton London.

Dr Parhi told Eastern Eye: “A lot of first generation south Asian families have invested heavily in property in the UK, both residential and commercial.

“Despite this, their children have often found themselves fighting in court over these estates because of the little planning that has been done before their death,” she said. “Understandably, parents want to mitigate inheritance tax (IHT) but do not want to lose control of their assets.

“There are tax efficient ways of (co-) owning a property portfolio to mitigate IHT on death, while also ensuring the property and wealth remains in the family.

“One of the ways to do this is by creating a personal investment holding company or family trust where they invest in the property.

“However, this planning requires specialist legal advice as the legalities around how and to what extent these transfers should be taxed are quite complex.”

Jasvir Singh CBE, a lawyer, said if someone is concerned about the impact that inheritance tax may have on them or their families, the first thing they should do is seek appropriate advice.

He added: “There are many ways of mitigating the impact of inheritance tax, ranging from setting up trusts to giving gifts over a number of years.

Jeremy Hunt

“Gifts that are more than seven years old by the time someone passes away will not be subject to inheritance tax, and up to a total of £3,000 each year can be given away as tax exempt gifts,” said Singh. “However, it can be quite complicated, so if in doubt, get financial and legal advice to help you.”

With the Consumer Price Index remaining at 6.7 per cent in November, Jatin Ondhia, CEO of property firm Shojin, has urged people to diversify their savings and investments.

Ondhia said: “Clearly, there is a long way to go to properly stabilise the economy and financial markets.

“So, prudence must remain the guiding principle for investors and, to that end, diversification continues to be a likely strategy for many, serving as a safeguard against market volatility. Indeed, investors must continue to be proactive, exploring all the different options available to them.

“It is still difficult to say where inflation and interest rates will go in the medium to long term.

“People must maintain control over their financial decisions, ensuring that each decision – whether for their savings or investments – aligns with their own risk tolerance and long-term financial goals,” said Ondhia.