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Speaker
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Transcript
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Tim Williams, Senior Associate, Burges Salmon
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Hello and welcome to season two of Death and Taxes, a weekly podcast by the Private Client team at Burges Salmon. My name is Tim Williams and I'm a tax and trust lawyer in the Private Client team and together with my tax and trust colleagues Guy Broadfield and Edward Hayes, will discuss a range of issues facing clients and professionals alike. In each episode we will be joined by specialist lawyers from around the firm to bring you our views on important topics for private clients. In this episode, the first of the new season, Ed and I are joined by our head of probate Rachel Pinn to talk about cross-border probate and estate planning. Rachel Pinn advises on all probate matters including international estates involving multiple jurisdictions as well as complex inheritance tax relief claims. Ed has extensive experience in advising on lifetime planning for international individuals and the administration of their estates.
So as we go through today's podcast I think it's going to become clear that we're talking about a very broad and very complicated area but Rachel if I could ask you first, could you try and narrow it down a bit and explain what we mean when we talk about cross-border probate and cross-border estates.
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Rachel Pinn, Head of Probate, Burges Salmon
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Yes. A cross border probate is one where there are assets in multiple jurisdictions or where a deceased was a national of or resident or domiciled in another jurisdiction, and indeed it is very common for both of those elements to be present. Cross-border probates have become far more common with clients becoming more internationally mobile and certainly in the UK we've seen a big increase in foreign ownership of property and ownership of property in London in particular by non-UK resident individuals has trebled since 2010 and that's probably an underestimation because there's a lot of different ways in which interests can be held in property, for example via company structures.
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Tim
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In essence part of this is either UK assets owned by what we might usually term offshore people or UK people with offshore assets, I mean because we're UK lawyers obviously so I guess that's part of what we're talking about here.
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Rachel
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That's right.
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Ed Hayes, Senior Associate, Burges Salmon
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That's exactly it yes and the other thing to really stress at the outset is just that across border probate is a very specialist type of probate and it's going to become obvious as we talk through the kind of different technical points and practical points here but you really do need someone who's experienced in handling them to make sure things run smoothly. So on the duration of this podcast we're going to talk through some of the key considerations both technical and practical and we're going to look mainly at the post-death period because obviously that's the one we tend to get involved with, but actually it will hopefully become clear to everyone that the more you can do during lifetime to gear up for this and make sure things are in place the better. And actually you can have a much, much smoother probate process if some steps have been taken during the deceased lifetime.
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Tim
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Rachel, you've often described probate as the wash in which everything comes out, so in a way Ed you're saying that during your lifetime you can do, you need to try and get yourself ready for making sure that there's no unpleasant surprises when you come to the final wash.
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Ed
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I think that's exactly it an excellent analogy. Shall we, maybe it's worth starting then with exactly why this is a specialist area and the kind of more niche I suppose things that you find here that you maybe don't come across in every day-to-day probate and I suppose one thing that you Rachel has a huge amount of experience of it is acting as a central coordinator and Rachel maybe you could talk us through a bit about what that entails.
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Rachel
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Yes we're obviously UK advisers so we can only give advice on UK law and how the procedure works here but obviously there's going to be lots of different jurisdictions involved and some of those jurisdictions are probably going to need advice there too but what's really key is that there is somebody who is pulling all of that advice together.
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Tim
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So the stakes in dealing with an international probate are extremely high I think one thing that we notice is that one of the key most expensive potential risks is in UK inheritance tax, key to the UK IHT position is domicile so it can be quite complicated to establish, it's quite a difficult concept so Ed you want to talk us through what domicile is and how you go about working out what someone's domicile status is.
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Ed
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Absolutely. So one of the first and most important things we will do when we're looking at a cross-border probate is to try and determine someone's domicile and try and make sure that whatever position is being taken has as much support as possible because it can make an enormous difference, it can often be the deciding factor in whether you're paying inheritance tax of 40% on everything around the world or just the assets situated in the UK and you can imagine the amount of money that is then at stake and why HMRC have quite a strong incentive to challenge a domicile statement that they don't agree with, so it's a really important point to get right and it's quite a confusing point often for clients who maybe aren't UK by origin because the phrase domicile in many jurisdictions is a much more practical one that basically means where are you living at the time. Whereas in English law it's a very legal technical concept and we actually draw a distinction between the residence which is effectively where you are physically living at any given time and domicile which is I think best described to a lay person as your emotional concept of home. So to give an example you know I've been born and raised in the UK my kind of families from the UK for a few generations and so the UK is very much my home in quotation marks. I could move to France for a couple of years and work there and I might become tax resident in France because that's where I'm physically living at the time, but I'd always think of the UK as my home and as long as I intended to come back here at some point I would remain UK domiciled. And for many of our clients who are living in the UK they're domiciled elsewhere around the world and that means that actually even though they've been here perhaps quite a long time sometimes a lot of their assets will be free of inheritance tax as long as we can persuade HMRC of that fact.
Now an important caveat here is that the UK also has a concept called deemed domicile and this can actually cause a person to be treated as being domiciled in the UK for inheritance tax purposes even if they are in fact domiciled somewhere else. This is most relevant for those who have been tax resident in the UK for at least 15 years but it can apply in various other circumstances as well and it's really just another reason why having a specialist tax advisor involved is really important.
Domiciled also has an impact on succession law and actually it's easy to think well I'm living in the UK and I've got a UK will therefore UK law is going to govern what happens to my assets and that's often not the case if you're not domiciled in the UK it can be that the law of the jurisdiction in which you are domiciled has quite a big impact on what happens to your assets even if you have a UK will so getting to the bottom of that domicile point is absolutely key and you can also find kind of interesting technical points which people just need to be aware of such as that certain double tax treaties can effectively subvert the normal UK rules on where someone's domiciled for these purposes and it's really easy to trip up and give HMRC some cause to doubt the domicile that you're putting to them when actually you know if they looked at everything it's quite clear-cut but you kind of say something or don't realise that a comment you're making could be misinterpreted and you kick off kind of an HMRC inquiry that wouldn't otherwise be needed thereby creating quite a lot of time and cost so we do a huge amount of domicile work both for clients during their lifetimes and for estates after death and we are very familiar with dealing with HMRC negotiations on this topic if HMRC don't immediately accept what we're saying and an absolutely central point in any cross-border probate is getting that topic right.
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Tim
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I think just picking up on the non-tax side of domiciled I mean it's probably worth noting that in the UK we have absolute testamentary freedom so you can leave your estate whoever you want to but many other jurisdictions around the world don't have that do they so there's a sort of an advantage and a disadvantage to UK domicile in that sense in that if you're a UK domiciled for succession purposes you might have more freedom but you may get a rather a hefty fiscal consequence to that in that your worldwide state will be subject to inheritance tax potentially.
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Ed
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Exactly and it's another reason why you know lifetime planning can really help here because sometimes you can be non-domiciled for tax purposes and even if you would find that the law of your domicile will be unhelpful from a succession perspective you can make an election sometimes to have you know another law applying particularly relevant here is Brussels 4 also known as the European Succession Regulation, if there are any clients with assets in the EU there are various elections you can make in that and steps you can take to try and ensure you know which law is going to apply to your succession and a classic example being if you're a UK national with property in France say, you can make an election to try and ensure that UK law applies that property so it won't be governed by the French forced heirship regime and you do have freedom as to who inherits it so yeah you need to be clear on your domicile if at all possible and ideally you need to take steps during your lifetime to try and ensure that what you want to happen to your assets is in fact going to happen to them.
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Tim
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So that's really helpful to talk through what domicile is and obviously that's a hugely important point but it's presumably also quite important where assets actually are in the world and whether they're in the UK or otherwise, is that right Rachel?
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Rachel
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Yes it's very important to understand that in both respects really if a non-domiciled if we're talking about a non-domiciled deceased then clearly we need to be very certain about where assets are because it's only those that are UK based that are going to be within the IHT net. But it's also important if somebody is domiciled as well because that there are tax treaties with other jurisdictions and there may be tax credits to be had so if you're paying UK inheritance tax on the same asset as another country is also charging attacks then it's very important to understand who can tax that asset first and what credits might be available.
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Tim
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So that comes back to your coordination points as well doesn't it Rachel that actually having an awareness not only of the UK tax position but an understanding of how double tax duties might work and how taxation in different jurisdictions interact with the UK is obviously really key.
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Ed
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It sounds like a simple question doesn't it you know where is an asset but actually it it can be quite fiddly in practice and you have to be really aware that we're talking specifically about where an asset is situated for inheritance tax purposes that's not always the same as where it's situated for other tax purposes and there's some really key differences for example with situs for CGT and IHT and it can be a bit fiddly in relation to particular assets so you know debts are situated where the debt was resident for inheritance tax purposes, there are specific rules for what are called specialty debts, which are debts recorded in deeds albeit HMRC's position kind of flip-flops on that every few years so you have to be quite aware of what position they're currently taking and partnerships and things I think often catch people out because we all think of during people's lifetimes but actually on death you'll find that for inheritance tax purposes it is your interest in the partnership that's taxed rather than the interest in the underlying assets and generally speaking that will be situated wherever the partnership is carrying on its business.
Now that can be quite key for things like collective investment schemes which are often structures of partnerships and for a non-dom you don't want those to be in the UK tax net and so that's quite a helpful rule but it can also catch people out who don't realise that maybe a partnership of holding you know solely non-UK assets might be situated in the UK actually if they're running it out of the UK so it's a point that needs to be checked quite carefully and particularly some of those older double tax treaties there aren't many estate or inheritance tax double tax returns out there in fact but some of the older ones have um kind of surprising rules that can alter where an asset is deemed to be situated for tax purposes there's lots of layers to that.
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Tim
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So with that in mind, the interaction between different jurisdictions and how inheritance tax can affect the tax there I mean who's actually liable to pay inheritance tax in a cross border estate?
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Rachel
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Well for the UK inheritance tax HMRC you're going to look to the executors. They're the people who have personal liability for any inheritance tax due and that will apply to executives who are based in the UK or executives who are not based in the UK.
Generally speaking they're only going to be liable to the extent of assets over which they have control, which is reassuring for the executors. It's also really important to note that in other jurisdictions that might be relevant there isn't necessarily an equivalent role to that of an executor and that the taxing authorities in those jurisdictions may look to the beneficiaries to pay the tax.
So again it just comes back to the importance of having that coordinator to understand exactly what tax is going to be paid where and by whom and also who is going to suffer the burden of that tax ultimately there being a distinction obviously between those who are responsible for paying the tax and those who are actually going to suffer it in practice in terms of a reduced entitlement.
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Tim
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And I think on that point it's worth saying isn't it that again lifetime planning can really make things much more straightforward here because if you if you've thought through which assets are going to who in your estate and what's going to be taxed where, you can try and make sure that you know who's paying the tax basically matches who's getting the benefit from a particular asset whereas if you don't match those things up it's surprisingly easy to find that someone who's getting a specific asset in a jurisdiction won't be liable for the tax on that asset and that actually the tax will come out of what we refer to as the residue or the residual estate which is kind of everything else left in the pot once you've given away any specific items you put in your will, so another example of how thinking about these things ahead of time can make life much easier and cheaper frankly for your heirs going forwards. So the question in my mind from all of that is where on earth do you start with this process?
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Rachel
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Yeah it's a difficult one and does require some degree of detailed thought at the outset. An example I had recently was of a deceased who was born in Scotland, lived there until he was an adult. He then moved to England where he married and had a family and then the family moved to Hong Kong where he then worked. So the family on his death were very concerned to know what they should do where he had assets in each of those jurisdictions, they didn't know where to start. So really in that instance it was a case of thinking about where he was likely to be domiciled and I think the reality was that we quickly reached the conclusion that he was probably going to be domiciled in England for tax purposes and we realised that if we got the UK or the English grant first, that we would be able to reseal that grant in Hong Kong fairly easily and then have access to the Hong Kong assets thereafter and similarly for the nature of the assets that we had in Scotland we were also able to use the English grant to transfer the assets there as well. So it was clear that from a procedural point of view starting in England was probably going to be the easiest method.
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Tim
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And that's a fantastic example isn't it of almost a surprise jurisdiction there Scotland is a separate jurisdiction from England for the probate purposes isn't it so a really great example of something that might appear to be relatively simple but it's actually really quite a fiddly.
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Rachel
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Yeah that's true I mean we've been referring to UK throughout and we do tend to use that as shorthand but it is important to notice that to note that Scotland is a different uh jurisdiction to England and Wales.
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Ed
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And of course we've got our Edinburgh office to help with this kind of thing now.
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Tim
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And I think just a final thing there Rachel you mentioned resealing there I mean then without going into the detail of it I mean that's sort of the idea of having a UK grant of probate isn't it and then asking a foreign court to endorse that?
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Rachel
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Yes certainly resealing is a process by which one jurisdiction will recognise a grant that was issued in another jurisdiction because they understand and recognise a system of law that exists there and it's usually sort of commonwealth countries where this applies and obviously in my example it was a case of resealing a UK grant in Hong Kong but the same thing applies the other way around as well and other grants in other jurisdictions can equally be resealed here in the UK.
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Tim
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So hopefully it's clear from all of that that cross-border probates do stand apart a little from what you might call your day-to-day UK probate that's both on a kind of practical level, on the technical knowledge and expertise that are required and actually on just the people you will need involved to help so it's very common on across border probate to need some foreign legal advice as well as UK legal advice even if the UK is acting as it were the hub coordinating matters and you know at Burges Salmon we've got a huge amount of experience dealing with non-UK and UK nationals with assets around the world, we do a huge amount of work on domicile as I mentioned earlier and that puts us in a really great place to kind of deal with these things with HMRC if there are any complications, we've also got a very broad network of firms around the world and certainly in all the key jurisdictions one would expect that we've worked closely with and so we're able to coordinate that in different jurisdictions and try and make the whole process as smooth as possible for clients and the goal in all of this whenever we're doing this kind of work is to try and make it as easy for clients as possible because it is complicated, it comes at the worst you know time often to be trying to explain difficult matters to people when they're coping with such an emotional issue and our goal is always to try and simplify that, take away a lot of the kind of the legwork as it were you know we'll do that and they kind of hopefully just get to see the end result and the opportunities that will hopefully flow from the estate moving on to the next generation as it often does.
Well thank you both so much that's a really helpful run through of what I think we've shown is really quite a thorny area and thank you very much for listening.
Thank you again for listening to Death and Taxes a Private Client podcast from Burgess Salmon. You can find out more about Burges Salmon and our team at Burgess-salmon.com or on our LinkedIn page. On next week's episode we'll be discussing family business so don't forget to subscribe to listen to that and all episodes from seasons one and two.
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