Pension IHT advantages of going to Dubai to die
22nd November 2024
Posted in Articles by Andrew Marr
Despite the rather flippant title, we are tentatively considering a rather extreme tax planning option to combat the high effective tax rates due to pensions falling into the IHT estate from 6 April 2027. You will recall that we gave a simplified example of the tax arising on a £4m pension fund a few weeks ago illustrating an effective tax rate of over 70%. We have amended this slightly for those eagle-eyed readers who requested we apply the nil rate bands accurately. Our changes mean that the tax rate increases to 72.45%! (see previous Tax Bite here). This could be even higher in different circumstances.
Unsurprisingly, we are being asked if anything can be done to improve matters. Below, we provide a somewhat wacky plan involving Dubai.
Flee to Dubai and make gifts out of income!
This strategy involves using a combination of pension tax treaty rules and IHT ‘regular gifts out of income rules’.
Revised example
Bill (aged 76) dies after 5 April 2027 with £4m in his pension scheme. He has £2m of non-pension assets and had inherited a £175,000 IHT residence nil rate band and a transferable nil rate band from his late spouse to go with his own bands of the same amount (totalling £1m). His daughter, Jill, has a 45% marginal income tax rate and opts to take everything out of the fund after Bill’s death.
Rather than staying in the UK to die (and leave Jill with massive tax liabilities) Bill gets creative. On 6 April 2026 he flies to Dubai on the back of very thorough advice on how to lose UK residence. Once he has established his Dubai residence Bill seeks an NT tax code (as a non-UK resident) from HMRC and asks the pension administrator to start making payments of £200,000 a month (say) out to him. Because of the tax treaty between Dubai and the UK, these payments can be made free of withholding tax. Bill then decides to make regular gifts out of this income to Jill. On the basis that he needs £100,000 per annum for living expenses then he could give £2.3m a year to Jill in this way. If Bill were then to die in Dubai within 10 years of departure, although his worldwide assets would be within the UK IHT net, any gifts to Jill would have reduced the value of the estate subject to IHT. Assuming the pension scheme value is depleted to £nil in this way, this would turn a 72.45% tax liability (above) on £4m into a 0% tax liability, getting £2,898,000 more into Jill’s hands.
Forbes Dawson view
This is quite an extreme piece of tax planning but will be tempting for some. It is also important in the above example that Bill goes to Dubai ‘to die’. If he were to return within six years then the income tax charge from all his pension withdrawals would be assessable to tax on his return. If there are no rule changes here, then it would be reasonable to predict that many adventurous and altruistic pensioneers will set off for far-flung lands. The good news for them is that Dubai is not the only place on the menu and there may be many ‘tax treaty options’ available.
In some cases, it may make sense to make gifts out of pension income, even without leaving the UK. Even though the pension income would be subject to income tax, this strategy would avoid the IHT charge (thus avoiding the double tax charges on death).
