Guide to Inheritance Tax & Succession Tactics for Non-Doms in the UK

Introduction

London is an attractive centre for the international business community. Many come here to work temporarily, but then find themselves becoming semipermanent residents.

Most will by now be alerted to the Income Tax and Capital Gain Tax (CGT) risks of staying for more than seven years. They may organise their non-UK sources of income with an eye to electing in or out of the remittance basis of taxation, and paying the £30,000 fee to secure the privilege.

Fewer people seem to take advice on the best methods of holding assets in the UK such as a house in London or the country, bank accounts, personal investments, insurance and pension benefits, with a view to mitigating Inheritance Tax (IHT).

Fewer still seem to worry about rights of succession to their assets in the event of unexpected death, or the IHT consequences of making lifetime gifts in the UK.

IHT Traps

There are four main “tax traps”

  • Assets “located” in the UK will be subject to IHT on lifetime gift, or death, whether the owner is UK domiciled or not.
  • From day 1 of the 17th year of residence in the UK, worldwide assets of a non-UK domiciled person become subject to IHT – and residence rules are being tightened
  • If spouses/civil partners are of different domicile, the IHT exemption for assets passing between spouses is limited to £55,000 when assets pass from the UK to the foreign spouse, during lifetime or on death.
  • For lack of appropriate Wills, the intestacy or forced heirship rules of both the UK and the country of domicile can have unexpected consequences, in terms of who inherits what, and IHT.

These traps can be avoided or at least mitigated with prior thought and planning, but all too often people will fall into IHT traps through simple lack of awareness that they exist.

Of course, most active business people, even if they take up residence in the UK for a relatively long time, do not expect to die here which is when the main IHT risks will emerge. One of the less obvious triggers for potential IHT problems is marriage between people of different domiciles, or forming a Civil Partnership, followed by buying a family home in joint names, or pooling cash deposits in joint accounts.

Location of Assets

As a general rule real property (houses and land) will be taxed, and succession to it will often follow, the law of the country in which it is located. In some cases, the worst consequences can be avoided by arranging ownership through a company registered in another country. However, costs can be quite significant for running a “structure” which is also efficient for Income Tax and CGT.

Moveable assets such as furniture, works of art, cash and jewellery may be taxed on the basis of physical location. However, on death in the absence of a Will, the distribution of them is more likely to be in accordance with the succession laws of the country of domicile than the country in which they are located. IHT will apply to moveables in the UK, but distribution may follow the succession laws of the home state.

Non-physical assets such as bank balances, securities and insurance or pension funds tend to be taxed according to the registered office of the business which holds or issued them. That is not always easy to ascertain. For example, a security purchased in the UK may be administered in Dublin but comprise shares in a BVI company. Holding non- UK registered shares may give a satisfactory IHT result, but cause access problems for your executors. Buying UK registered shares or Government Stock may be accumulating an IHT problem.

The key for non-UK domiciled people is to ensure that the bulk of their assets are treated as excluded property for IHT, which mainly has to do with location being outside the UK.

Intestacy & Forced Heirship

Problems can arise for non-UK domiciled individuals owning assets in the UK who die without leaving any Will. A Will made in their home state which was not written with assets located in the UK, or IHT, in mind can also cause problems. When assets are located in the UK and other countries the opportunity may exist to select the law which will apply to obtain maximum IHT advantage. In some cases Tax Treaties will decide for you.

IHT Strategies

Avoiding or at least mitigating IHT is not so difficult if an asset protection strategy has been designed in advance of the purchase of assets in the UK, or importing them. By ensuring the correct holding vehicle, and making carefully integrated Wills in both the UK, and other countries where assets are located, you can ensure the correct people succeed to your assets, avoiding unnecessary IHT or local taxes in the process.

Our Service

The Stone King service makes a careful initial analysis of the ownership and location of family assets, their holding vehicles, and the IHT and succession rules which may apply when an unexpected death occurs.

We can advise on conflict of laws, as well as disputes over the validity of Wills, protecting assets from divorce, and minimising tax. We will help you make well informed decisions about asset protection, and make appropriate Wills or set up Trusts.

The law and practice referred to in this article or webinar has been paraphrased or summarised. It might not be up-to-date with changes in the law and we do not guarantee the accuracy of any information provided at the time of reading. It should not be construed or relied upon as legal advice in relation to a specific set of circumstances.

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