Confusing rules surrounding inheritance tax means skilled estate planners are more vital than ever, says Old Mutual International’s David Denton.
Inheritance tax (IHT) divides opinion, because it creates the potential for a person’s wealth to be taxed twice; firstly, as it accumulates through income and/or capital gains taxes, then again on death. Although the overall IHT collected by the UK Exchequer is low compared to other personal taxes, the percentage growth in recent years has been marked, given significant asset price inflation and the nil-rate band (NRB) remaining static.
A 2015 report by the Office of Tax Simplification (OTS) reviewed and ranked 107 areas of taxation and identified IHT as the third-most complex terms of ‘underlying complexity’. The subsequent introduction of the virtually impenetrable residence NRB in 2017 increased the number of reliefs and exemptions to 95, one more than was identified by the same report.
This would all suggest that IHT is an easy tax to plan for, but unfortunately this isn’t the case, given the need to understand both your domicile of the rules where you have become resident, the location and type of your wealth. It’s too early to say whether the OT’s most recent and ongoing review of the administrative and technical aspects of IHT (instigated by the chancellor, Philip Hammond, in 2018) will be helpful for you and your planner, or indeed the Treasury.
‘Out of over 100 areas of taxation, IHT was ranked third in terms of underlying complexity’
Defining the problem
If you are UK domiciled, you are liable to UK IHT at 40% on all your assets worldwide (with an exemption of £325,000 – the NRB – and any other available reliefs) regardless of where you are resident. If you become non-UK domiciled you are only liable to UK IHT on your UK situs assets, subject to most of the same reliefs and exemptions.
Whereas residency looks at where you are actually living, domicile is broadly based on where your permanent or habitual home is and where you intend to live indefinitely. This may or may not be the country in which you are currently resident. In some cases, a person’s domicile may be a country which they have never visited but from which their family originates (their ‘domicile of origin’).
Unfortunately domicile is not defined in UK tax legislation and, unlike residency, there is no statutory test. So those overseas who hope to leave behind the shackles of UK taxation must be mindful of Her Majesty’s Revenue & Custom’s (HRMC’s) apparently subjective approach.
Until 2009 it was possible to seek a provisional ruling from HRMC asking them to confirm whether enough had been done to satisfy a change in your domicile at the time of request. However, this reassurance is no longer possible and the burden of proving a change of domiciles sits with the party asserting the change, normally posthumously.
The extensive RDRM23000 series of HMRC manuals outline the burden and standard of proof required, as well as the information and documents required from the deceased’s executors. Specifically, RDRM23030 states: ‘A change of domicile is never to be lightly inferred, particularly a change from a domicile of origin to a domicile of choice, which is regarded by the courts as a serious step requiring clear and unequivocal evidence. The standard of proof in this area is the civil one, on the balance of probabilities, but discharging it requires suitably cogent and convincing evidence.’
The UK has double tax treaties with more than two-thirds of the world’s 195 sovereign states, many of which follow the Organisation for Economic Co-operation and Development (OECD) model. Unfortunately, but perhaps not surprisingly, IHT does not feature in this model.
The UK has just six double tax treaties for IHT, with Ireland, South Africa, the USA, the Netherlands, Sweden and Switzerland. Treaties with France, Italy, India and Pakistan were in place before 1975 during the Estate Duty era and have different rules to eliminate double taxation, with other implications for UK arrivers and deemed domiciles.
If a transfer upon death is liable to IHT and another tax is imposed by another country with which the UK does not have an agreement, unilateral relief may be available, although this requires the taxes to be similar and may require careful negotiation.
For example, although the UK system is based on the wealth of the deceased, many other countries have systems which are recipient-based. For example, a liability could depend upon the value you receive, where you live, the bloodline between recipient and donor, and your pre-existing wealth (which some readers may recognise as the system known as ISD applying in Spain). Also, the calculations used for unilateral relief do not always reduce the liability as efficiently as one might expect.
Even someone who has successfully acquired a domicile of choice overseas where IHT or estate duties do not apply can still be liable to tax upon death in the UK and beyond, if wealth is owned in a country where estate duty applies.
Most notoriously, citizens of the US, courtesy of Donald Trump’s 2017 Tax Cuts and Jobs Act, have a generous exemption of $11.4m upon their demise. However, many non-citizens with US assets (even where held on platforms outside the US) are limited to a derisory exemption of just $60,000.
‘The complexity of IHT legislation, numerous reliefs and exemptions, means estate-planning skills are highly valued, no more so than in the cross-border arena’
The complexity of the IHT legislation, numerous reliefs and exemptions, and the need to bring into consideration every aspect of the estate, often in multiple jurisdictions, means that estate-planning skills and knowledge are highly valued, no more so than in the cross-border arena.
To find out more, including how AAM Global Wealth Structuring can help you plan to mitigate the impact of IHT, speak to your AAM Wealth Manager or email [email protected]
Soure: Our sister company, Old Mutual International
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