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1st Ethical s Guide to Islamic Inheritance Tax Planning & Will Writing TM Tax Planning Through Trusts 2004 All rights reserved Contents page 1. Introduction 1 2. Basic Principles of Inheritance Law 2-3
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1st Ethical s Guide to Islamic Inheritance Tax Planning & Will Writing TM Tax Planning Through Trusts 2004 All rights reserved Contents page 1. Introduction 1 2. Basic Principles of Inheritance Law st Ethical s Wealth Calculator st Ethical Solutions Essential Shariah Considerations 8 in conjunction with Islamic Relief s Islamic Wills Guide 6. What Next? 9 Trusts App TM Tax Planning Through Trusts 1st Ethical Limited Chorley House 58 Chorley New Road Bolton BL1 4AP Phone: Fax: Website: Regulated and authorised by the Financial Services Authority Copyright notice: All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying or otherwise, without the prior permission of 1st Ethical Ltd. 1st Ethical: Tax Planning through Trusts Introduction All praise is due to Allah, who alone is worthy of worship. We praise Him, seek His aid, and ask His forgiveness. Allah is the one who gives life and He is the one who takes it. As Muslims we are required to bear the consequences of death with patience and forbearance, and learn from the experience so we may better prepare ourselves for the next life. Ameen. Welcome to 1st Ethical s Guide to Islamic Inheritance Tax Planning & Will Writing. 1st Ethical is the UK s only national firm of authorised and regulated Independent Financial Advisors catering exclusively for the needs of the Muslim community. The firm specialises in income, corporation, capital gains and inheritance tax mitigation via Trusts that adhere to principles of Shariah. It has long been 1st Ethical s desire to prepare a guide that comprehensively deals with the issues surrounding Islamic estate distribution in conjunction inheritance law. So do I really need to plan for my death? There are a number of compelling reasons why each of us should have a valid Will in place: 1. Adherence to Shariah principles on estate distribution 2. Legal protection of rights of Beneficiaries, especially young children 3. Mitigation or elimination of any inheritance tax liability. The obligation of making a Will is found in the following hadith: It is the duty of a Muslim who has anything to bequeath not to let two nights pass without including it in his Will (wasiyya). (Sahih al-bukhari) The implications of dying without a Will in Britain are aggravated by the laws of intestacy, which distribute the estate in predetermined shares to the surviving partner and children. The net result is a distribution of assets contrary to Shariah law. Moreover much of the wealth may be legally trapped. The disputes that can arise from this state of affairs can trouble families for generations. Please refer to the Islamic Wills Guide (pages ) for more information. Unfortunately our experience has shown that only a tiny percentage of Muslims in the UK have a legally binding Will. Of these many are poorly structured and will not fulfil their intended purposes when the time comes. The following pages contain a concise description of the key factors to consider when preparing a Will from a Shariah perspective in a tax efficient framework. Let s start with a look at the basic principles of inheritance law. 1st Ethical: Tax Planning through Trusts 1 Basic Principles of UK Inheritance Law Inheritance tax (IHT) is payable at a rate of 40% on certain assets within a deceased person s estate in excess of 263,000. This individual allowance is revised annually and known as the Nil Rate Band (NRB). There are a number of relatively straight-forward steps which can substantially reduce or even eliminate any IHT liability, if arranged prior to death. Whilst there are many exemptions and reliefs available, the following is a summary of the most relevant principles. Gifts between Husband and Wife (Inter Spouse Exemption) Gifts of any value, made by the deceased to the surviving spouse, before or on death, are exempt from IHT. However, these gifts may be liable to IHT on death of the surviving spouse. It is important to note that English law does not recognise the Islamic Nikkah ceremony as having legal force, if undertaken in the United Kingdom, except where those performing the ceremony have been granted a license to issue marriage certificates. Consequently, it is important for clients wishing to use this exemption to possess a civil marriage certificate. If required, these can be obtained by attending a marriage ceremony at a local registry office. If the surviving spouse is not UK 2 1st Ethical: Tax Planning through Trusts domiciled, the inter-spouse exemption is limited to 55,000. A popular use of this exemption is to ensure on death all assets in excess of the NRB are passed to the surviving spouse. Lifetime Gifts (Potentially Exempt Transfers) Gifts of any value are deemed to be exempt from IHT, if made seven or more years prior to death. IHT is payable in full on gifts made less than three years prior to death, and on a sliding scale, on gifts made between three and seven years prior to death. Gifts in which the donor retains some beneficial interest (e.g. a house in which the donor continues to reside rent free) are considered to be Gifts with Reservation. They are liable to pay IHT in full, irrespective of when the gift was made. Business Property Relief The transfer of shares in an on going business concern are exempt from IHT, if the shares have been owned for two or more years by the deceased. This relief is of crucial importance to business owners, as the vast majority of trading companies and partnerships will qualify for this relief. Annual Exemption A single gift of 3,000 per annum can be made which is exempt from IHT. Any unused annual exemption can be carried forward one tax year enabling a maximum 6,000 to be gifted. Charitable Bequests Gifts of any value made to a U.K. registered charity are exempt from inheritance tax (IHT). Deeds of Variation The Beneficiaries of an estate are able to retrospectively revise a Will after death, usually for religious, family or tax reasons. In order for a Deed of Variation to be accepted by the Inland Revenue, all Beneficiaries must be over 18 and sane, and give their written consent within two years of death. Deeds of Variations are typically very costly and time-consuming. Now that the basic principles of inheritance law have been covered, please complete 1st Ethical s Wealth Calculator (overleaf) in order to as certain the value of your estate and potential inheritance tax liability. Investment companies, or properties, both commercial and residential, generating rental income normally do not qualify for Business Property Relief. 1st Ethical: Tax Planning through Trusts 3 1st Ethical s Wealth Calculator 1st Ethical has developed a variety of solutions to mitigate any IHT liability in accordance Shariah. Completion of the following will establish your potential IHT liability. Please refer overleaf for our range of solutions. Husband Assets Wife Property and Possessions Family Home Second Home Other Property Home Contents Cars Jewellery Other Property and Possessions Family Home Second Home Other Property Home Contents Cars Jewellery Other Financial Assets Husband Bank Accounts Building-Society Accounts National Savings Premium Bonds Shares Units & Investment Trusts Investment Bonds Gifts ISAs/PEPs Pension Plans (not in Trust) Endowments (not in Trust) Life Policy (not in Trust) Money owed to you Wife Bank Accounts Building-Society Accounts National Savings Premium Bonds Shares Units & Investment Trusts Investment Bonds Gifts ISAs/PEPs Pension Plans (not in Trust) Endowments (not in Trust) Life Policy (not in Trust) Money owed to you 4 1st Ethical: Tax Planning through Trusts Financial assets cont. Gifts made in last 7 years Other Financial Assets Financial cont. assets cont. Gifts made in last 7 years Other Total Combined Assets (A). Husband Liabilities Wife Mortgages Outstanding Mortgages Outstanding Bank Loan Bank Loan Car Loan Car Loan Overdraft Overdraft Credit Card Credit Card Other Debts Other Debts Funeral Expenses Funeral Expenses Total Combined Liabilities (B). Total Combined Assets (A) Total Combined Liabilities (B) = Net Worth (C) Net Worth (C) =. IHT Allowance = 263,000 Potential IHT Liability = (C - 263,000) x 40% Potential IHT Liability = 1st Ethical: Tax Planning through Trusts 5 1st Ethical Solutions Having established your potential IHT liability, the next step in the process is to identify which solution is right for you. Work through the flowchart below and identify which of the six proposed solutions best suits your current circumstance. Once you have identified the correct solution please refer to the page opposite in order to gain a more detailed understanding of our proposals. Married Couple no Is your combined net worth (C)* more than 263,000? yes SOLUTION 1 yes Is it greater than 526,000? no no Is it greater than than 1.5 million? yes SOLUTION 2 SOLUTION 3 SOLUTION 4 Single Person no Is your individual net worth (C)* more than 263,000? yes SOLUTION 5 SOLUTION 6 * Refer to 1st Ethical s Wealth Calculator on page 4 and st Ethical: Tax Planning through Trusts Important Note: For an explanation of the types of Trusts mentioned below please refer to the Appendix. Married Couple SOLUTION 1 Shariah Compliant Mirror Wills Suitable for clients with an estate valued less than 263,000. Each partner requires a simple Will stipulating that their respective estates are to be distributed in accordance with Shariah principles upon death by their executors. SOLUTION 2 Shariah Compliant Mirror Wills with Discretionary Trust(s) Suitable for clients with an estate valued less than 526,000. Each spouse needs to prepare a Will in accordance with Shariah which may include a Nil Rate Band Discretionary Trust. By utilising both NRB s any tax liability is avoided. SOLUTION 3 Shariah Compliant Mirror Wills with Discretionary Trust(s) and a Flexible Lifetime Interest Trust Suitable for clients with an estate valued less than 1.5 Million. Each spouse requires a Will in accordance with Shariah incorporating two key Trusts. Firstly, a Discretionary Trust (DT) into which assets equivalent to the Nil Rate Band will pass on death. Secondly, a Flexible Life Interest Trust (FLIT). This is a Trust in which the surviving spouse has a right to income for life. All assets above the NRB will pass tax free in to the FLIT. SOLUTION 4 Shariah Compliant Mirror Wills with Discretionary Trust(s) and a Flexible Life Interest Trust with additional bespoke Lifetime Planning Suitable for clients with an estate valued in excess of 1.5 Million. In addition to Solution 3, lifetime planning involving off-shore residency and domicile maybe required. For this a bespoke strategy is recommended. Single Person SOLUTION 5 Shariah Compliant Will Suitable for client with an estate valued less than the 263,000. A simple Will stipulating the estate is to be distributed in accordance with Shariah principles on death is required. SOLUTION 6 Shariah Compliant Will with Discretionary Trust(s) Suitable for clients with an estate valued in excess of 263,000. A Will in accordance with Shariah which includes a Nil Rate Band Discretionary Trust. Further lifetime planning involving off-shore residency and domicile maybe required. For this a bespoke strategy is recommended. For a more detailed analysis on your solution please contact 1st Ethical. 1st Ethical: Tax Planning through Trusts 7 Essential Shariah Considerations In conjunction with the Islamic Wills Guide (Pages ) To ensure Shariah compliance within a legal framework all our solutions contain a Letter of Wishes, complimenting the Will, requesting an Islamic distribution of the estate. After stating that funeral expenses and material debts have been paid, the Letter of Wishes will also state the deceased s intentions regarding the following: Bequests Bequests are gifts from an individuals estate made on death. Anyone can bequeath one third of their estate to whomsoever they wish except Fixed Share Inheritors (see below). Bequests are optional and not compulsory. Any expiatory payments (Fidya) made in lieu of missed fasts, prayers and kaffarah, or bequests to non-muslim relatives are to be made from this third and cannot impinge on the rights of the fixed share inheritors without their explicit permission. Bequests from this third can also be made to charity. Any donations made to a UK registered charity will also be exempt from inheritance tax. Please log onto for further information. Fixed Share Inheritors The remainder MUST be distributed to the deceased s family in line with the fixed shares stipulated in Sura An Nisah in the Quran. In the majority of cases, the estate is usually shared between the deceased s remaining parents, spouse, and children. It is best to consult a qualified scholar to determine the precise shares, or log onto Alternatively contact 1st Ethical. Any gifts made during life are not subject to this Quranic injunction. Lifetime gifts should be equally shared between children irrespective of gender. *Please Note: 1st Ethical is not responsible for the content of any external links. 8 1st Ethical: Tax Planning through Trusts What Next? As this guide has illustrated, it is crucial to ensure that a Shariahcompliant Will is complemented by tax-efficient planning. Failure to do so may result in hefty tax bills, costly and bitter family disputes and the restrictive Laws of Intestacy being applied. To recap, a valid Will enables: 1. Adherence to Shariah principles on estate distribution 2. Legal protection of rights of Beneficiaries, especially young children 3. Mitigation or elimination of any inheritance tax liability. 1st Ethical have in place a national team of specialist inheritance tax advisers. We already advise numerous Muslim businesses and professionals (doctors, dentists, barristers etc.) on how to mitigate income, corporation, capital gains and inheritance tax liabilities within a Shariah-compliant framework. To ensure legal validity, all of our solutions are drafted and compiled by qualified and experienced Solicitors, who have many years experience of not just writing Wills, but also administering estates after death, obtaining probate from the courts and negotiating the inheritance tax liability and payment terms with the Capital Taxes Office. Should you wish us to help prepare your Will and inheritance tax planning, please download the Inheritance Tax Planning Fact Find from our website Upon completion, please post to: IHT Dept 1st Ethical Limited Chorley House 58 Chorley New Road Bolton BL1 4AP Or to: (If your assets exceed 1.5 million, much of the planning required will be bespoke - please contact our offices directly on to arrange an initial consultation.) If you have not already done so, please complete the wealth calculator (page 4), and follow the subsequent flow chart diagram (page 6) to diagnose which of our solutions you are likely to require. We end as we began. Allah (swt) states in the Quran: Wheresoever you may be, death will overtake you even if you are in a fortress built up strong and high. (An-Nisaa 4: 78). Any element of this guide which is good and beneficial is from Allah (swt) and any errors are from us and shaytaan. May Allah (swt) bless this guide and make it a means by which we return to His commandments and revive the example of our Noble Prophet Muhammad (peace be upon him) concerning the forgotten sunnah of inheritance planning and will writing. Ameen. 1st Ethical: Tax Planning through Trusts 9 Appendix : Trusts A Trust is a legal wrapper which separates control and ownership of an asset. The person establishing a Trust (a Settlor) directs the Trustees on how to deal with an asset, on behalf of the person(s) entitled to the asset (the Beneficiaries). It is vital that the Settlor appoints appropriate Trustees of strong faith when preparing a Will. The Trustees are ultimately responsible for ensuring the assets within the Trust are distributed in accordance with the Settlor s wishes, and for calculating the appropriate Shariah shares. Trusts are normally set up in the following circumstances: 1. During an individual s lifetime (lifetime planning). 2. On death through appropriate instruction within a Will. 3. As a result of the laws of intestacy. The vast majority of 1st Ethical solutions involve the establishment of Trusts upon death, through appropriate instructions detailed in the Will. Consequently, the loss of control resulting from placing assets into Trusts during one s lifetime is avoided. Trusts are normally always preferred as a mechanism for distributing assets to Beneficiaries upon death, over directly bequeathing to Beneficiaries as they strengthen asset protection. Whilst the majority of Trusts are short term devices, needed only for as long as it takes to distribute the assets, Trusts crucially enable the Trustees to protect the assets in the estate through exercising discretion at the time of distribution. Trusts allow asset distribution to be deferred in the case of a potential Beneficiary being a minor, or an adult going through a divorce, or through bankruptcy proceedings. Trustees can also, with the express permission of the Beneficiaries, gift the entitlement of an elderly Beneficiary to a younger member of the family. This is vital in preventing an inheritance tax charge which otherwise would have been incurred on the death of the elderly Beneficiary. Of the many types of Trust available, the following are used most often: Discretionary Trusts (DT) A DT gives the Trustees full discretion to decide which Beneficiaries benefit from the Trust assets at any given time. The Trustees are normally guided by a letter of wishes written by the Settlor. A lifetime transfer into a DT up to the Nil Rate Band (currently 263,000) can normally be made without IHT charge. 10 1st Ethical: Tax Planning through Trusts Flexible Life Interest Trust (FLIT) aka Interest in Possession Trusts The creation of a FLIT Trust means that Beneficiaries are entitled to any income of the Trust fund as it arises. If the main Beneficiary in the FLIT is the spouse, and the Trust is established upon death, as is commonly the case, all assets are eligible for inter-spouse exemption relief. This applies even when the majority of assets are ultimately distributed to other Beneficiaries. There are Income Tax and Capital Gains Tax implications on the transferring of assets into and out of Trusts along with the growth generated within a Trust. The implications can vary widely depending on the type of Trust being considered. Please contact 1st Ethical if further information is required. 1st Ethical: Tax Planning through Trusts 11 TM Tax Planning Through Trusts 1st Ethical Limited Chorley House 58 Chorley New Road Bolton BL1 4AP Phone: Fax: Website: Regulated and authorised by the Financial Services Authority Disclaimer: This document does not constitute financial advice under the Financial Services and Markets Act 2000 which supersedes the Financial Services Act Winners of the Shell Livewire: UK s Fastest Growing Business of the Year award North-West Entrepreneur of the Year award TM
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