Many high net worth individuals who do not consider themselves to be UK residents die without putting their UK tax affairs in order, leaving their family to deal with the any questions from HM Revenue & Customs.
In this article, Olga Tabenko and Penny Wotton, private client specialists at law firm Fieldfisher, explain how HNWIs can avoid falling into this trap.
Not that kind of PR
When an individual dies leaving assets in the UK, it is usually necessary to obtain a grant of representation from a UK probate registry to deal with those assets and, eventually, distribute them to the beneficiaries.
The procedure can be long and complex, especially if the deceased was an internationally mobile HNWI with assets in various jurisdictions.
Often, a lack of awareness of UK probate rules by the deceased and the absence of appropriate tax planning during their lifetime further complicates the process and leads to issues for the family when they apply for the grant.
Responsibility for applying for the grant and administering the deceased’s estate lies with their personal representatives (PRs), who are often family members, appointed in the deceased’s will or under the intestacy rules if there is no will.
To obtain the grant, the PRs usually have to complete and file form IHT400 with HMRC, which is an account of the deceased’s assets and liabilities.
Form IHT400 asks for extensive information about their personal and financial position. This gives the taxman the opportunity to look into various aspects of the deceased’s tax affairs prior to their death to ascertain how much inheritance tax (IHT) is due from the estate.
Areas of particular interest to HMRC are domicile and residence status, plus any offshore structures the deceased created or benefitted from.
Where was tax paid?
One of the first questions asked on form IHT400 is where the deceased was domiciled.
If the PRs claim that the deceased was domiciled outside the UK, it is necessary to complete a supplementary form (IHT401) to support that claim.
The form asks for information about the deceased’s UK tax residence status (potentially covering the last 20 years) and their personal history; including place of birth, nationalities, education, employment history and any intentions regarding their life in the UK.
It also requires the PRs to disclose the approximate value of the deceased’s non-UK assets, even though these are not subject to IHT where the deceased was not domiciled or not deemed domiciled in the UK at the time of death.
If the deceased held substantial wealth overseas (and a large amount of IHT is at stake) this may prompt HMRC to examine the deceased’s domicile status, turning the grant application into a tax enquiry.
Where did they live?
Form IHT401 also asks for information about the deceased’s UK residence status, to establish whether the deceased was deemed domiciled in the UK at the time of death.
The PRs will not always be able to say with certainty whether the deceased was UK resident in any given tax year, particularly where the deceased travelled extensively without keeping records of travel, and had connections with other countries.
A fact-finding exercise may have to be carried out and, if it is established that the deceased was UK resident in a tax year in which they thought they were not, the PRs will be responsible for regularising the position and settling any outstanding income tax and capital gains tax liabilities.
Incorrect assumptions can be made about a person’s UK resident status because, unlike the rules on residence in some other jurisdictions, the UK Statutory Residence Test looks at the number of days spent in the UK and at an individual’s UK connections, such as family, accommodation and work.
If specialist advice is not obtained on resident status, a non-UK resident can inadvertently become UK resident by, for example, erroneously assuming that they can spend up to 183 days per tax year in the UK without becoming a tax resident.
The IHT form also asks for details of any debts due to and from the estate.
HNWIs often set up non-UK trust and company structures to hold assets for succession and tax purposes and money is often lent to, and borrowed from, such structures.
The taxman may request that details of the debts and structures be disclosed.
As UK tax rules relating to offshore structures are complex and have undergone a number of changes in recent years, HMRC may want to scrutinise any structures and related transactions to check whether any UK tax liabilities are outstanding.
Thinking in advance
HMRC enquiries can run for a long time, be expensive and stressful for the deceased’s family and have a detrimental effect on the estate.
To reduce the risk of enquiries and disputes with HMRC and protect loved ones, it is advisable that HNWIs invest in appropriate advice and wealth planning during their lifetime.
Advisers should ensure their clients understand any advice given, so they can make informed decisions regarding their personal and financial affairs and appreciate the implications of their actions on themselves and potentially their family further down the line.
The following questions may be a good starting point for those with connections to the UK:
- Am I UK tax resident?
- Am I domiciled or deemed domiciled in the UK?
- Do I need to file tax returns in the UK?
- Do I complete my UK tax returns correctly/can I claim the remittance basis?
- Are my finances arranged in a tax efficient way?
- Are my asset holding structures up-to-date, tax efficient and administered correctly by suitable professionals?
- Does this transaction have UK tax consequences?
- Do I need an English will?
This article was written for International Adviser by Olga Tabenko and Penny Wotton, private client specialists at law firm Fieldfisher.