Cross-Border and Complex Estates

Whenever a person’s international connections require us to interact with succession / inheritance laws outside of England and Wales and death tax regimes other than those in the UK, this will be a cross-border estate.

Key Concepts

General law Domicile:

This is a test under English and Welsh law to determine the one legal territory that the person is most closely connected to in a permanent or indefinite sense. The test can cover many factors; the persons origins, their family and social ties, where their economic interests and assets, particularly real estate, are located and is assessed on a case by case basis.

Deemed Domicile:

This is a UK inheritance tax (IHT) specific test. It is simpler to determine than general law domicile as the sole variable is the number of years or part years of UK income tax and CGT residence. If the individual was UK tax resident in more than 15 out of the 20 UK tax years preceding their death, regardless of their general law domicile status, they will be considered ‘deemed UK domiciled’ for IHT purposes and this will expose their worldwide estate to UK IHT.

Before becoming ‘deemed domiciled’ a person who was non-general law domiciled in England and Wales would only be exposed to UK IHT upon the assets they own situated in the UK.

English Private International Law (PIL) rules state that the succession laws of England and Wales will always apply to any immovable assets (basically real estate) situated here. These same rules state that the succession laws of England and Wales never apply to immovable assets situated outside of England and Wales – we always refer that question to the succession laws applying where that immovable asset is situated.

What about everything else? Well, under these PIL rules, everything that is not immovable is movable (e.g. bank accounts, investments, personal property). These PIL rules specify that all such movable assets pass in accordance with the law of last domicile (general law test).

Not always. They will have their own PIL rules which may conflict. A negotiation usually at the level of the lawyers will follow, with any intractable differences having to be referred to the courts of one or other or both jurisdictions.

If a person dies general law domiciled in England and Wales, their worldwide estate will be exposed to IHT.

It is possible for someone to die domiciled out of England and Wales for general law, but because of long term residence in the UK, their worldwide estate is still exposed to IHT under the deemed domicile rules.

The key spouse and charity UK IHT reliefs can only be claimed if those beneficiaries benefit under the applicable succession law. English and Welsh succession law is flexible and can usually be moulded to maximise such reliefs, whether during the testator’s lifetime through planning or by agreement amongst their adult estate beneficiaries within two years of the death by a deed of variation.

However, where a deceased’s estate is exposed to worldwide IHT and another country’s succession laws control how assets devolve, achieving tax efficient outcomes can be much more difficult. Often this is because the other country’s succession laws are less flexible (e.g. forced heirship) and / or because a variation which would work for UK IHT will not for that country’s succession and tax rules.

The UK has only signed up to ten IHT double tax treaties – far fewer than for income tax and CGT. The countries, in date order (earliest treaty) first are:

Type 1: India, Pakistan, France & Italy (pre-date the ‘deemed domicile’ concept enabling planning opportunities)

Type 2: Republic of Ireland, South Africa, USA, The Netherlands Sweden & Switzerland.

If the death tax arises in a non-treaty country, ‘unilateral relief’ to UK IHT can still be available, the UK IHT refund being capped at the level of UK IHT charged on the foreign property.

We nearly always have to categorise cross-border estates as ‘complex’, because they will involve us engaging with lawyers and possibly accountants from other jurisdictions and the outcomes and time frames are highly case and country specific. Indeed, the greater the value of assets and or connections outside of the UK, but where the UK and or English connections are still strong, typically the greater the complexity.

There are therefore three main groups of cases:

1. English / UK ties very strong with the majority of assets situated here but there are one or two international aspects. Complexity level: medium.

2. English / UK ties strong but there are competing strong claims from one or more foreign jurisdictions and assets are in a variety of worldwide locations (‘foreign’ jurisdictions include Scotland and Northern Ireland). Complexity level: high.

3. English / UK ties weak – we are just requested to deal with one or two discrete English or Welsh assets and the nexus of the estate is clearly in another place with lawyers in that jurisdiction controlling the world-wide estate administration – for example a reseal case.  Complexity level: medium.