Common UK issues arising with cross-border estates

In a world where global mobility is more common, people are aware of the benefits that can be achieved from tax and estate planning before moving in order to ensure that their assets are passed to their loved ones. However, increasingly little consideration is given to how a global estate is administered or to the interaction of estate tax between the two (or more) jurisdictions.

Many instances are now seen of individuals moving to the UK for several years, then either passing way in the UK or in their home country while retaining their UK assets. Typically these assets include property, bank accounts, life policies, investments and other valuable assets.

Challenges in locating and valuing UK assets

The first practical difficulty is establishing if there is a UK will, dealing with the UK assets, in addition to a will made in the deceased’s home country. The personal representative (PR) then needs to locate and value the UK assets. This can be difficult for UK-based PRs but is more onerous for a foreign PR. Some assets are easier to locate than others (real estate for example), but database searches provided by search companies can assist.

IHT and international taxation issues

For many foreign nationals, only their UK-situs assets will be subject to UK inheritance tax (IHT). Where the deceased is taxed on their worldwide assets (more estates will fall into this following the new government’s changes to domicile rules), foreign PRs need to be reminded that assets that are not taxed in their jurisdiction may nevertheless be chargeable to UK IHT. In addition, where there are foreign trusts, practitioners need to look at the trust deeds to establish the tax treatment. Most commonly, US citizens create living will trusts to avoid having to apply for probate in their home country, which is lengthy and costly. In most cases, these are treated as a bare trust for UK IHT purposes; however, the deeds and the assets held need to be considered.

UK IHT is based on the deceased’s domicile, a concept that foreign PRs often have difficulties with, and detailed explanations need to be provided with reference to any double taxation treaty (DTT). In cases where no IHT is due, for example the value is beneath the threshold, then taxation issues are avoided. However, there may still be an IHT reporting requirement: something that is often overlooked.

Where IHT is due, consideration needs to be given as to which country has primary taxation rights and whether there is an estate/death taxes DTT in place for IHT (there are relatively few as compared to the more well know income and gains DTTs). This is complicated further as different assets are subject to different rules (for example, moveable vs immoveable). Where a third jurisdiction is involved, tax becomes exponentially more complex.

When the IHT has been settled, an application for probate needs be submitted if the estate comprises assets that require a change of title or bank accounts with balances above the banks’ de minimis limit for probate.

A difficulty frequently encountered when collecting UK assets of a foreign estate is that many institutions (HMRC included) will not pay funds to a foreign bank account. Alternatively, they will pay only to an executors’ bank account and not, for example, to the trustees of a living will trust who act as quasi-PRs.

The estate self-assessment tax return then needs completing (where informal reporting cannot be followed). Whether income or gains are taxed depends on the residence of the estate. Where there are only foreign PRs, this is relatively straightforward. However, where an estate is dual resident, with PRs in both the UK and another country, it will be subject to income tax and capital gains tax in both jurisdictions. PRs can look to the double taxation convention (DTC) to resolve the taxation issues affecting them both. The DTC contains the provisions that are designed to eliminate or relieve the double taxation that can occur when income/gains arise in one country to the resident of the other country. The DTC has special rules for determining whether the PRs (as a whole) are regarded as UK-resident. In cases where this cannot be established and both countries have equal claim to primary taxing rights, then it is left to HMRC and the foreign tax authority to agree between them who gives the credit.

While advisors to PRs of foreign estates may know what needs done to administer a foreign estate, how to navigate the complexities that arise with a UK estate is a completely different challenge.

Written by Louise Day, Manager, Private Client Team, Buzzacott