When an individual dies, their assets (e.g., properties, bank accounts, investments, stocks and shares, valuable personal possessions) and their liabilities (e.g., credit cards, utility bills, personal loans, mortgages, Income Tax) are calculated as at the date they died. Altogether, the sum of these assets and liabilities is known as that individual’s ‘Estate’.
If the individual had assets which were not in the UK at their death, such as overseas investments, bank accounts or a holiday home, their Estate would be a ‘cross-border’ Estate, as their assets are not only based within the UK borders.
It is therefore important to consider how such an Estate should be dealt with, as there are more administrative points to consider than an Estate comprising solely assets within England and Wales.
What is domicile and why is it relevant?
One crucial issue to establish when dealing with a cross-border Estate is the individual’s domicile.
Domicile is often confused with residency. Although the two concepts can be related, they are distinct. Residency status within a country refers to an individual’s right to live in that country and may impact their rights to enjoy certain privileges such as voting.
Domicile, on the other hand, refers to which legal system applies to an individual, either during their lifetime or after their death. This becomes relevant when an individual either spends some or all of their time outside of the UK, or where there are other factors which link the individual to another jurisdiction, such as having parents with domicile in that jurisdiction, having assets there, or intending to return ‘home’ to their country of origin one day. These factors are not exhaustive, and domicile is a complex legal issue which must be considered carefully.
Why is domicile relevant for cross-border Estates?
When dealing with a cross-border Estate, domicile is a key factor as it will impact the Inheritance Tax treatment of the Estate.
If an individual is UK-domiciled for tax purposes, at their death there will be Inheritance Tax to pay on all of their worldwide assets, after deduction of the individual’s personal allowances such as the available Nil Rate Band and Residence Nil Rate Band, if applicable. The current rate of Inheritance Tax is 40% for the portion of the Estate over these thresholds, which can result in a significant Inheritance Tax bill.
If an individual is not UK-domiciled, however, their Estate will only be subject to Inheritance Tax on their UK situs assets. This is obviously a far preferable position for the Estate and its beneficiaries.
Therefore, if it can be successfully demonstrated to HMRC that an individual was not domiciled in the UK for tax purposes prior to their death, there can be significant savings to Inheritance Tax.
How is an Estate dealt with if there are assets inside and outside the UK?
The Executors appointed in the individual’s Will are responsible for dealing with the administration of the Estate after that individual dies. When the Estate comprises assets both in and out of the UK, this must be done with great care.
A vital part of Estate administration is to obtain a Grant of Probate (or a ‘Grant of Letters of Administration’, where there is no Will), which provides the Executors with the legal authority to deal with the deceased’s Estate according to their Will (or the Intestacy Rules, where no Will exists). Where the Estate has assets in the UK, a UK Grant must be obtained.
The requirements for dealing with the individual’s assets in other jurisdictions will depend on where in the world the assets are. In most cases, a Grant of Probate or similar will be required in the other jurisdiction and for that, a legal specialist with expertise in the law of that jurisdiction should be instructed to deal with this.
If the other country in which the individual had assets was in the Commonwealth, it is usually possible for the Executors to apply to the Probate Registry in the UK for this Grant of Probate to be ‘resealed’, rather than having to apply for a separate Grant in the UK. This is an agreement made between the Commonwealth countries and the same can usually be done in reverse too, so that the UK Grant is obtained first and then resealed in the other jurisdiction. The order of doing so will often be decided depending on whether assets need to be released to pay for Inheritance Tax, or because there are time limits imposed by the other jurisdiction.
It is important to note that, although in the UK we have ‘testamentary freedom’, i.e. the ability to leave our assets to whomever we choose on our death*, the same is not true in all other countries. For example, France has ‘forced heirship’ rules which apply when an individual is domiciled in France, and this decides who will receive their immovable property, such as a house, on their death.
*Despite our testamentary freedom, we do, however, have legislation in the UK which allows people from within specific categories, such as children, to make a claim against our Estate if they feel they should have been provided for under our Will. This is an important consideration when putting Estate Planning in place.
What kind of Will do I need if I have assets outside of the UK or I am not domiciled here?
When putting your Will in place, it is important that you make us aware of any assets you hold outside the UK as we will need to tailor your Will to account for this. We are not specialists in the law of other countries, and we will therefore advise you to instruct a lawyer either in that jurisdiction or otherwise specialising in it, to ensure you are properly advised of your tax position relating to those assets. The Will we shall prepare for you will deal with your UK assets only.
It is important that both of your advisors are aware that you are making two Wills, as there is otherwise a danger that the Wills may accidentally invalidate each other. This is because standard wording in Wills will state that you are revoking any other Will you have made, but we must amend this wording to make it clear that this does not revoke your Will in the other jurisdiction.
We will also establish your domicile and, if you are domiciled outside of the UK (or it is likely that this can be argued at your death), we will often recommend including a statement of domicile to reflect this. Your domicile at your death will depend on a number of complex factors, however this can be an important step to try and reduce the Inheritance Tax payable by your Estate.
It is important to obtain proper legal advice for all individuals who own or are thinking of obtaining assets outside the UK, and for Executors tasked with dealing with an Estate with non-UK assets or a non-domiciled individual. If you would like assistance with cross-border Estate administration or planning, we would be delighted to assist you with this. We can also advise you on steps you may be able to take to reduce your own Inheritance Tax liability on your death and to pass more on to your family, so if you would like to speak to us about this, please contact us to speak to a member of our Private Wealth & Inheritance Team.
