Brownlie v Four Seasons Group
A long qualified colleague of mine recalls a time when he rarely encountered private clients with cross-border concerns. Those ‘unusual’ cases only involved just one international asset – a holiday home in Spain or France. The advice was limited to telling the client to take local legal advice on the holiday home, excluding that foreign asset from the English Will and hoping for the best. Gone are those days.
Indeed, scarce now are the moments in central London private client practice when we work on client matters that have no international dimension. We have become accustomed to asking a raft of personal history details at the outset of every client engagement so we can assess the extent of their international connections. You would hope that succession law and inheritance tax had kept pace with the growth in our cross border connectivity… but you would be wrong – the pace of helpful legal and taxation change has generally been much slower. Accordingly, much complexity remains.
Here are my top tips for finding a way through the cross-border minefield; I have tried to keep matters as jargon free as possible but the subject matter demands a certain degree of unavoidable ‘technical’ analysis.
1. A time to be born, a time to die, a time to plan(t)…
Perhaps obvious but worth repeating: an English Will speaks from death. However, when you plan it, you only know for sure what your present international links, assets and beneficiaries comprise and relevant succession laws specify. Therefore, to have proper peace of mind, you must regularly review.
Residence, habitual residence, domicile, nationality and citizenship are (i) all different tests (ii) apply to different legal concepts and taxes (iii) are interpreted differently in different jurisdictions. Try to keep the idea that these are separate in your mind as far as possible.
3. Complicated UK
Every place has its oddities but the patchwork of systems that make up the United Kingdom of Great Britain and Northern Ireland are little understood externally, and, dare I say it, within these islands too. The UK comprises three separate legal jurisdictions: England & Wales (E&W), Scotland and Northern Ireland. Scottish and English succession law are really quite different, Scotland having an element of forced heirship. However there is one main tax authority (HMRC). There is one central executive government in London, but now also devolved executive / legislative bodies in Scotland, Wales and Northern Ireland with the power to make their own laws. There are three crown dependencies (Jersey, Guernsey and Isle of Man) and 17 British overseas territories (e.g Bermuda, BVI, the Falklands, Gibraltar) which are linked to the UK but have separate legal jurisdictions and tax systems.
Here at Kingsley Napley, we are E&W lawyers regulated to advise on E&W succession law, but we also need to consider and advise upon UK tax, and particularly in this context, UK inheritance tax (IHT).
4. Real(ly) personal
It’s important to distinguish between the types of asset you own. For E&W succession law, the most important distinction is probably immovable (basically real estate) and movables (basically everything else). In the international context, the E&W jurisdiction presently allows you to gift E&W real estate in your name to whosoever (including legal persons such as charities or other entities) you choose. This is irrespective of your other international links. Similarly, E&W refuses to deal with the succession of real estate in your name located outside of E&W. These rules are practical; ownership of real estate can be easily enforced by the courts of E&W on its own territory, but not elsewhere.
Dealing with you your movable estate requires us to apply our succession law connecting test of domicile (essentially, were you permanently or indefinitely connected with E&W at your death?). If you were E&W domiciled, E&W courts would uphold an E&W Will of worldwide movables. However, getting foreign banks and courts etc to obey those E&W court orders is another thing.
5. Inheritance (I prefer ‘succession’) law and tax are different
UK inheritance tax (IHT) is confusingly similar but in important respects different, from E&W succession law. Think of it this way: E&W courts are pragmatic and don’t necessarily want to come into conflict with other jurisdictions, especially when their ruling would be difficult to enforce (e.g. over foreign real estate). In contrast, the UK government hope HMRC will maximise global tax receipts so empower them to cast the UK IHT net further. Here are two illustrations of this discrepancy:
Example 1: ‘deemed domicile’ is a special concept devised for IHT. It applies if you have been tax resident (the relevant test for other UK taxes such as income and capital gains tax) in the UK for 15* successive UK tax years (this can happen in as little as just over 13 years if you have the misfortune to arrive at the end of tax year 1 and leave shortly into successive tax year 16). Once you are deemed UK domiciled, your worldwide estate becomes subject to UK IHT, even if for succession law, you are not domiciled in a UK territory.
Example 2: HMRC’s situs rules grab all UK ‘movable’ assets too. For example, if you were non UK domiciled and held a bank account at a UK branch and shares or investments registered in the UK, E&W succession law says these are movable assets and should pass under the succession law of your domicile. For UK IHT however, these bank accounts, shares and investments, will be deemed UK situated, so do not escape this tax unless a double tax treaty changes these situs rules (see more below).
*Pre 6 April 2017, there was a ‘17 year’ rule. The new ’15 year’ rule is believed to be effective from 6 April onwards, but UK government turmoil has meant a delay on the empowering legislation. It is however widely believed that the ‘15 year’ test will soon come into force in the same form as the draft version already published.
Example 2: HMRC’s situs rules grab all UK ‘movable’ assets too. For example, if you were non UK domiciled and held a bank account at a UK branch and shares or investments registered in the UK, E&W succession law says these are movable assets and should pass under the succession law of your domicile. For UK IHT however, these bank accounts, shares and investments will be deemed UK situated, so do not escape this tax.
6. Executor? Estate? Holiday Reps?
The fundamental E&W concept of appointing trusted persons to deal with a deceased person’s affairs (executors where there is a Will and administrators where not - collectively they are called personal representatives (PRs)), is not understood in many jurisdictions. Instead, in those jurisdictions, the beneficiaries or heirs step straight into the deceased’s shoes (and could in theory become liable for all that persons debts, even if the deceased person was insolvent). Therefore, the concept of ‘an estate’ or a limbo period between death when the assets and proper pre and post death liabilities (including inheritance tax) are paid, leaving a pot available for distribution by the PRs, does not exist.
Bear this in mind when trying to match up your E&W Will with any other non-E&W Wills you may have.
7. Double trouble
If you have an international estate and UK IHT is payable on your death, surely double tax treaties will cancel out overseas inheritance tax? Well, not necessarily. In the UK, the PRs are ultimately liable for UK IHT. The PRs should not distribute to the beneficiaries before settling this (otherwise they will be personally liable). However, non-UK jurisdictions such as France (where there is no concept of PRs) or the Republic of Ireland may structure their inheritance differently so it falls on the beneficiaries or heirs personally. In some children inheriting from their deceased parent would receive more generous inheritance tax treatment than those same children in the UK. If both the UK and the overseas territory claimed inheritance tax, the UK might only refund a figure equivalent to the foreign inheritance tax (which if zero because all covered by foreign exemptions), would mean no refund.
The UK has only entered into 10 double tax treaties applicable to IHT and many of these are substantially out of date.
8. In sickness and in he…lp
In E&W, marriage of itself does not change how spouses own property. However, in other jurisdictions, e.g. France, a matrimonial regime is applied automatically. Matrimonial regimes are not identical. Some deem all pre-and post-marriage property, to be jointly held, thus everything passes to the surviving spouse whereas at the other pole there is total separation of ownership between spouses (as in E&W). Needless to say, if a foreign matrimonial regime applies, this will affect your international assets and must be considered before any death planning.
9. (For)give and forget?
Automatic accounting for lifetime gifts and balancing on death to certain persons (‘hotchpot’) has been abolished in E&W. However, it remains in many other jurisdictions and so local advice and records must be kept if such a non E&W regime could apply to your estate.
Records as regards UK IHT should also be kept because gifts made within the 7 years before death need to be declared as they use up the tax free allowance.
10. EU mean me?
Since 17 August 2015, all 28 EU states apart from the UK, Ireland and Denmark have been bound by the EU Succession Regulation (Brussels IV). In a nutshell, this seeks to resolve inter-state succession law differences. Four key points are:
(i) the place of habitual residence of the deceased is the default rule for determining applicable succession law;
(ii) the only flexibility to change this is by electing for the law of your nationality to apply instead;
(iii) only one applicable succession law shall apply (i.e. barring limited exceptions, real estate and non-real estate assets should not be subject to different states’ succession rules, but instead just one controlling state’s succession rules); and;
(iv) it only applies to succession law, not inheritance taxes.
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