Extract taken from the original article by Cristian Angeloni, initially published on International Adviser..
Read full article here.

Tax treaties, recognition of trust structures and different laws make inheritance hard to navigate

With wealthy families being more mobile and international, their tax and financial planning has become more complex.

One of the biggest issues they face is establishing an inheritance strategy, which takes into account all of their liabilities and potential taxes, plus the domicile and the location of their assets.


While inheritance tax (IHT) targets the individual gifting their assets or money, their domicile is what determines what needs to be taken into consideration when seeking financial planning.

Devil’s in the details

“UK IHT is a donor-based tax. If the deceased is a UK domicile, the liability is on the worldwide estate – less exemption and reliefs. And for a non-domicile their UK estate – less exemptions and reliefs,” David Denton, international tax expert at Quilter International, told IA.

“The amount chargeable in the UK does not depend upon the domicile or residence of someone who inherits.

The European case

When it comes to cross-border planning, unsurprisingly, provisions can become more complex, despite several efforts aiming to harmonise international laws, especially within the European bloc.

“It is still relatively easy to come unstuck when making plans to transfer assets to their heirs,” Andrew Dixon, head of UK & international wealth planning at Kleinwort Hambros, told IA.

“For example, ‘forced heirship’ and ‘usufruct’ are not concepts we understand in the UK, but are common in Europe where civil law dominates.

“Similarly, many countries limit the amounts an individual can gift by applying a tax charge above a certain threshold. By contrast, the UK does not limit gifts to other individuals, but retrospectively taxes those gifts if donor fails to outlive the gift by seven years.”


Don’t get things mixed up

The problem is that simply moving assets outside the UK won’t exonerate wealthy families from their IHT liabilities.

The chief executive of the Aisa Group, James Pearcy-Caldwell, warned that there are three main misconceptions people need to be aware of when it comes to inheritance tax.


He continued: “The third point is relevant especially where an individual is compelled to return to the UK. It can destroy all their planning very quickly.

“If beneficiaries or executers live in the UK, then they have a legal requirement to report any inheritance received. This often negates the so-called ‘tax planning’ that has taken place overseas.”

Solve the problem

When asked about what wealthy families can do to avoid being in HM Revenue & Customs’ (HMRC) crosshairs, many told IA of one particular vehicle.


Plan ahead and then plan some more

Besides issues relating to taxation treaties or cross-border differences in legislation, there are also personal matters that people must be prepared for, warned Lana Corrienne Mallon, senior wealth planner at Lombard International Assurance.

“Other issues can intensify the discussions around inheritance planning. Sometimes it is personal; such as divorce, age and retirement, the international movement of children and grandchildren or climate.

“Sometimes it is financial; performance of the stock markets, the ‘health and wealth’ of a county’s currency or changes in a jurisdiction’s tax regime.”

This is why planning ahead is imperative.

“The UK government’s stance may have hardened significantly over the years, but there are still considerable planning opportunities available for international clients to minimise or avoid liability to IHT,” Irwin Mitchell’s Hazara added.

“Non-UK domiciled status gives particular scope for IHT planning, because assets situated outside the UK, other than an interest in a close company/partnership or loan that derives value from UK residential property, are outside IHT.

“Because liability to IHT is based on domicile, a non-domicile status is more valuable for IHT than for other UK taxes.

“But IHT planning cannot be undertaken in a vacuum. Measures taken may have an impact on an individual’s [capital gains tax (CGT)] or [income tax] liability.

“Any planning should therefore always take into account all the tax effects as well as the individual’s circumstances as a whole,” Hazara said.