How Britain's Richest Duke Saved ￡4 Billion In Inheritance Tax !

In 2016, the blue-blooded English aristocracy was shaken to the core with the unexpected death of their most wealthy member, the Duke of Westminster. The ancient law of primogeniture meant that the estate skipped his eldest daughters and passed to his only son, the 25-year-old Hugh Grosvenor. This incredible inheritance of ￡9.9 billion instantly made the young Duke one of the richest people in the UK and the wealthiest person under the age of 30 on the face of the earth. While this inheritance would usually attract a tax liability of 40% or ￡4 billion clever trust planning meant that no tax was payable.

The fabled Grosvenor fortune owes its origins to an ancestor, Hugh Lupus, who was the head huntsman to William the Conqueror and received Cheshire in 1066 for protecting the region from the Welsh by fighting with wolf-like ferocity. ‘Fat Hugh’ had a crest of a laughing dog which provided the inspiration for Lewis Carroll’s grinning Cheshire Cat in ‘Alice In Wonderland’ 

Chesire is the present seat of the Grosvenor family and the site of the magnificent Eaton Estate. As a result, future members of the family were always born with the proverbial ‘silver spoon in their mouths’. 

600 years after acquiring Cheshire, Sir Thomas Grosvenor married the 12-year-old Mary Davis, whose dowry included 500 acres of swampy bog west of the City of London. In 1720, the family realised that London was suffering from overcrowding and the plague, so they drained the swamp and leased out the land to wealthy, aristocratic residents. They then built mansions for the super-rich in Mayfair and by the early 1800s, started developing the southern area of the family land creating Belgravia. Today, Mayfair and Belgravia remain the most expensive and exclusive parts of London and an incredible 300 acres still belong to the family today. The Grosvenor family is currently the largest landowner in Britain and is the only family that owns more land than the Queen herself. 

We all owe a huge debt to the Second Duke of Westminster who won a landmark tax case against HMRC in 1936 allowing him to pay his horticulturists in a tax efficient manner. Lord Tomlin, who was the presiding judge stated that ‘Every man is entitled if he can to order his affairs so that the tax attracted under the appropriate act is less than it otherwise would be. Therefore, he cannot be compelled to pay an increased tax’. This precedent formed the justification for the legality of tax avoidance and led to generations of tax advisors like us today. 

When the third Duke of Westminster died in 1953, the estimated value of his estate was between ￡40 million and ￡60 million. This attracted an inheritance tax liability of ￡11 million which at the time was the largest death duty liability ever paid to HMRC. Thereafter, the Grosvenor family focused their considerable resources on minimising the tax liability each time the estate was passed on to successive generations. As a result, the 5th Duke of Westminster decided to embark on a 12-year legal battle to prove that his grandfather’s brother, the 4th Duke died as a result of an exploding shell while commanding a unit in 1944 during WW2. Despite the Duke dying 23 years later of cancer, his legal team were able to establish a questionable link between the war injury and cancer which led to his death. The Grosvenor fortune was therefore exempt from inheritance tax due to the Duke dying in ‘the service of his country’. 

With rapidly escalating property prices, the estate which was worth tens of millions was set be worth hundreds of millions and by 1979, when the fifth Duke died, the Grosvenor fortune was now worth an estimated ￡800 million. However, before his death, the bulk of the estate was transferred into discretionary trusts. Today, this would be treated as a Chargeable Lifetime Transfer and attract an immediate inheritance tax liability of 20% or ￡200 million but as the transfer was pre-March 1986, it was not subject to the lifetime tax charge. 

The UK has some of the most generous tax legislation in the world and has enabled the aristocracy to keep their large fortunes intact and safe from repeated charges to inheritance tax. A trust constitutes a separate legal entity that has immortality and never forms part of an individual’s estate. By choosing a series of discretionary trusts, the trustees have a whole list of family members who form potential beneficiaries which the trustees can choose to appoint benefits to. This clever wording means HMRC cannot point a finger to any potential beneficiary like the young Duke and say that the ￡9.9 billion belongs to him or his late father. The billions appreciate in the trust and cascade down to successive generations protected from inheritance tax. The trust assets are managed by independent trustees who have a legal interest but not a beneficial interest in the trust assets. This allows the trustees to manage the trust assets within the trust in accordance with the powers awarded under statutes and the trust instruments. 

Discretionary trusts are subject to an inheritance tax periodic charge of 6% based on the value of the trust assets and in the case of the Grosvenor fortune, this would amount to ￡600 million every 10 years. This is where the family have taken advantage of the generous 100% Business Property Relief available on unquoted trading company shares. This has been done by ensuring that the property company in the trust carries out the trade of property development such as the new 1,000 home Barton Park Development in Oxford which is the largest construction in the area for the current generation.  Business Property Relief is not available on investments such as rental buildings but by actively carrying out property development and employing over 500 people, the Grosvenor Property Company in the trust is classified as a trading company and claims the exemption. 

Another company in the trust is Wheatsheaf which focuses on agricultural solutions covering food, energy and water solving challenges in feeding the world’s population in an environmentally friendly manner. Due to its strong environmental credentials, it would be eligible for both Business Property Relief and the 100% Agricultural Property Relief.

Finally, the Grosvenor Trusts also include the Family Investment Office which employs more than 470 people who manage the agricultural estates in the UK which include mountains, lakes and the impressive La Garganta estate in Spain.

The maintenance of agricultural or natural land for public benefit enables this entity to claim the Agricultural Property Relief exemption of 100%. As a result of these exemptions, the trusts avoid the periodic charge every 10 years. In addition, discretionary trusts are subject to an exit charge when assets leave the trust. However, the trust instruments probably forbid any assets leaving the trust as the intention is for the 1,000-year fortune to pass on to future family descendants.

The person responsible for designing this tax-efficient structure was the 6th Duke, Gerald Grosvenor, who admitted that he found his great wealth more of a responsibility than a pleasure. He has been very close to the Royal Family and viewed himself as more of a custodian of the Grosvenor fortune instead of the beneficiary. He said, ‘In the context of eternity, if I am lucky I might live for 70 years, but this estate has been with us for hundreds of years. I am only a mere flicker in the process of time. It is what I do with it, rather than what I am worth, that I believe is more important’. To that extent, he must be commended for devoting his life to charitable causes and guaranteeing that future generations would inherit a well-run business and estate. 

One can’t help comparing his dignified demeanour to the brash ‘nouveau riche’ who are obsessed with outward displays of wealth, each more ostentatious than the last.

The current Duke, Hugh Grosvenor, was shielded from his great wealth and attended a state school to ensure he would be more ‘down to earth’. Speaking about his son in 1993, his father said: “He’s been born with the longest silver spoon anyone can have, but he can’t go through life sucking on it. He has to put back what he has been given.” 

There is no doubt that the young Duke is well provided for. The trusts can easily afford to pay out annual income of at least ￡400 million to ￡500 million a year for his entire life without having to reduce the capital assets. Income from a discretionary trust is received net of a tax credit of 45% which must be paid by the trust at source to HMRC. Anyone who plays Monopoly knows that if you are lucky enough to own Mayfair, you are set for life and the current and future descendants of the Grosvenor family will always own the most exclusive areas in the country.

Neil Da Costa is a Senior Tax Lecturer with Kaplan. He believes in keeping things simple and rigorous exam question practice. He is the author of ‘Advanced Tax Condensed’, a book of memory joggers that makes learning the huge syllabus manageable. Visit neildacosta.co.uk or connect on LinkedIn if you would like to purchase a copy.