THOUGH THEY SOUND remarkably similar, tax evasion and avoiding taxes are two completely different games. Whereas tax evasion is a criminal offence that could result in a hefty fine or even a jail term, avoiding or minimising tax liabilities could be considered good common sense. Tax rates and taxible activities can vary from country to country. Under United States tax law, for example, US citizens may be subject to taxation even though they have lived and generated income from overseas for years. Conversely, Hong Kong tax law operates territorially, taxing only income generated in Hong Kong, regardless of domicile or nationality. Sovereign Trust (Hong Kong), the Hong Kong member company of the international Sovereign Group, specialises in providing tax, trust incorporation and offshore banking advice to meet the needs of various nationalities. Jacques Sherman, Sovereign Group consultant, said busy people often neglected areas that might affect their financial futures. For British residents this often means overlooking the issue of inheritance tax. Mr Sherman said many British expatriates failed to realise that they remained subject to Inheritance Tax (IHT) even if they left Britain a long time ago. Liability to IHT often comes as a nasty surprise to the family of a deceased expatriate. The rate of IHT is 40 per cent of the amount by which the total value of a British expatriate's worldwide estate exceeds the nil rate band, which is GBP275,000 ($3.89 million). 'Over the years, British IHT thresholds have in real terms fallen. During the past five years alone, house price inflation has hit 60 per cent, while the nil rate band, the threshold above which IHT applies, has only increased by 16 per cent,' Mr Sherman said. One way of minimising the impact of IHT is to set up a trust. Mr Sherman said a trust could be a useful means of tax planning. 'They can be very flexible, even the settlor can continue to benefit from the trust assets. Trusts can also provide other advantages, including substantial savings in income tax, capital gains tax, and inheritance tax and estate duty,' he said. 'A trust allows a person to provide for those who may be unable to manage their own affairs such as infant children, the aged or persons suffering from certain illnesses.' Preserving family assets against mismanagement is another common motivation for establishing a trust. A person may wish to ensure that wealth accumulated over a lifetime is preserved as one fund.