It is said that death and taxes are the only two certainties in life and in most countries the two are linked so that when a person falls off the perch, they are taxed for it!
 
Estate planning might seem unnecessary if you're still decades from retirement, but it is a prudent move - particularly when you consider that if you don't make any alternative provision for your assets, the government could get the lot.
 
Even if you do plan, there is a chance that your assets will be taxed and paid for by those who inherit. For example, in the UK the current threshold for Inheritance tax (IHT) is £300,000 per person, so if your assets exceed this when you die, a tax of 40% will be levied on everything above that level.
 
The £300,000 threshold might sound a lot - but not once you have included the value of any property. The average price of a house in the UK is now over £150,000 (over £300,000 in London), which doesn't leave much space to get in under the IHT threshold.
 
Unless spouses are of different nationalities, transfers between husband and wife are not liable to inheritance tax, but when the surviving partner dies, the tax kicks in on the whole liable estate at the 40% rate.

Do you know if you are caught by the UK inheritance tax net?
You may have been living abroad for some time now, but don’t think that this means you have escaped. Two simple questions will enable you to decide. Firstly, where are you domiciled? Secondly, where are your assets/investments located?

Domicile
For IHT purposes there are two tests of domicile, the 'common law' test and the statutory test. If you domiciled in the UK under either test, your world-wide estate will assessed to IHT when you die. The basic principles of the English common law domicile are as follows:

• A person is only able to have one domicile at any given time. Contrast this with dual citizenship/nationality, for example.

• Every person has a domicile of origin, which is generally speaking the domicile of the person’s father when the child is born.

• If a couple married prior to January 1st 1974, the wife is treated as having acquired the same domicile as her husband on that date.

• To acquire a new domicile by choice, it is necessary first of all to move to a new jurisdiction and, secondly, one must then prove that they have formed an unequivocal intention to remain permanently in that particular jurisdiction.

Proving the necessary 'state of mind' is often difficult, but in short no one factor will be conclusive, it is necessary to look at all the circumstances as a whole. It is important to note that the onus of proof is on the person claiming the change of domicile. In the context of IHT, for persons coming to the UK the onus is therefore on the Revenue to prove that a UK domicile has been acquired by choice. For persons leaving the UK, the onus is on the tax payer to prove that he has lost his UK domicile and acquired a new domicile abroad by choice.

Example 1
Mr and Mrs Swan are UK domiciled. They move to New Zealand to work on a conservation project, but end up buying a house there and living there for nine years until they are both killed in an accident. If the Swan’s family wish to claim that they had acquired a new domicile of choice in New Zealand, the onus is on them to produce sufficient evidence to prove that they had formed the necessary intention to do so.

In addition to the above, there is a statutory test of domicile for IHT purposes only. Where a person has been tax resident in the UK for 17 out of the last 20 years of assessment, they are automatically deemed to be domiciled in the UK for IHT purposes. Furthermore, when a UK domiciled person emigrates, they remain domiciled in the UK for IHT purposes until they have been domiciled outside of the UK for three complete years.

Example 2
Let us assume that when Mr and Mrs Swan’s moved to New Zealand they intended to do so permanently. Having “sold up”, they left these shores on 30th June 2004. Under the common law test it is possible that they acquired a new domicile of choice in New Zealand immediately upon arrival. However, under the statutory test they will remain domiciled in the UK for IHT purposes until 6th April 2008. This is because in the tax year 2004/5 they were resident in the UK. It is not until 6th April 2008 that the 17/20 test is broken (assuming they do not become resident again in that year!).

Assets situated in the UK
Let us now assume that it is clear that you are domiciled outside of the UK. Assets situated in the UK when you die will still be within the scope of IHT. The following assets will be situated in the UK:

• UK real estate.

• Cash deposits at a branch of a bank in the UK. There is, however, an exception for foreign currency accounts owned by non domiciled individuals who are also non-resident. Such accounts are outside the scope of IHT.

• Shares or securities registered in the UK.

• Debts where the debtor resides in the UK.

To avoid IHT, it is common practice for non-domiciled individuals to own their UK property through a non-resident company. One looks to the location of the shares owned, rather than to location of the underlying asset. This has, however, in recent times triggered a number of complex tax issues, particularly for non domiciled persons occupying UK real estate owned by such an offshore company.

If you find yourself in danger of becoming domiciled in the UK, either under the common law test or the 17/20 statutory test, it is possible preserve long term protection from IHT by transferring foreign situated assets (including shares in an offshore holding company) to a trust prior to the change in domicile. The Revenue are, however, known to be looking at the beneficial IHT treatment of such `excluded property trusts`, with a view to changing the rules.

Excluded Property
To encourage investment in the UK, a handful of UK situated assets are ignored when calculating the IHT charge. These include government securities owned by persons ordinarily resident abroad or by the trustees of a settlement a life tenant of which is ordinarily resident abroad. Also ignored are investments in authorised unit trusts or open ended investment companies (OEIC’s) if they are owned by non domiciled individuals or settlements of which they were settlor when non UK domiciled.

A Trap for a Mixed Up Couple
There is a catch where only one of a married couple is domiciled in the UK (it does happen!). Usually, assets passing between spouses on death are exempt from IHT. However, where assets pass from a UK domiciled spouse to a non UK domiciled spouse, there is only a limited spouse exemption of £55,000. Conversely, assets passing from a non UK domiciled spouse to a UK domiciled spouse benefit entirely from the spouse exemption.

Example 3
Mr Cullen, a kiwi, came to the UK to work. He met a beautiful English lady and soon married her. They settled in the UK, and bought a property here in joint names for £800,000. However, Mr Thorpe’s views on long term residency remain uncertain and so he retains his New Zealand domicile. His lovely wife then died in an accident. His wife’s half share of the property is worth £400,000. Having deducted the IHT nil rate band allowance (available to all) of £263,000, and the limited spouse exemption of £55,000, the excess of £83,000 will be subject to tax at 40%.

In short, do not assume that you are outside of the scope of IHT simply because you have severed all connection with the UK. When seeking to establish a new domicile of choice abroad carefully consider how you can prove that you have in fact formed the unequivocal intention to remain permanently abroad. The onus of proof is on you. Non resident or non domiciled persons looking to invest in the UK are able to do so in such a manner that will keep their assets outside of the scope of IHT. Investing in real estate for the occupation of the investor is more complicated and careful structuring is required.

The contents of this document only represent a general summary and should not be a substitute for specific advice. The tax consequences for each individual will depend upon their personal circumstances so it is essential that individuals take appropriate professional advice accordingly.

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