Traveller's checks

There are many issues that need to be considered when dealing with a client who has international aspects to their assets and life. It is an important and sophisticated area of planning and there are many traps and pitfalls to avoid.
 

Born free
 

The first step when looking at the international client is to establish their domicile and residence status. This is a key role for any tax planning, as a non-domiciled and UK resident status will mean tax is paid on UK income and gains with an option not to be taxed on non-UK income and gains, while if you happen to be non-resident then you are only taxed on UK source income.
 

It is often easy to make assumptions about the tax profile and geography of a client. But just because an individual is born in one country, does not mean they are domiciled there. An international client may have a foreign spouse.
In these circumstances you need to be aware of the inheritance trap for mixed-domicile marriages. In this case, gifts and inheritance from a UK-domiciled spouse to their non-UK domiciled spouse are limited to a fixed spouse exemption of £55,000 plus the available nil-rate band, while everybody else can take advantage of 100 per cent spouse exemption.

 

You must consider first a client’s domicile of origin. Under normal circumstances, this is the father’s domicile at the date of the child’s birth, or the mother’s domicile in the case of unmarried couples. In many cases this will mean that the second generation of immigrants will still be domiciled in the country where their father was born. The domicile of origin will continue unless the individual acquires a different domicile through choice.
 

A domicile of choice occurs when a person voluntarily makes a new territory as his residence and intends to remain in that territory for the rest of his life.
Whether a person has attained domicile of choice is a question of intent. Once established it is relatively difficult to abandon. Therefore, you need to consider the intention of the client. If they still have significant links to the domicile of origin and visit regularly ?and have the family burial in that country there is a good argument that they have not changed their domicile through choice.

 

Though a client might be domiciled abroad, one needs to be aware of the deemed domiciled rules for inheritance tax, that state that if you have been resident in the UK for 17 out of 20 years you are deemed to be domiciled in the UK, in which case you need to pay inheritance tax at 40 per cent on your worldwide estate. Spin this around and the client who is living in the UK will have to be resident in another country for at least three years before they lose their domicile status for inheritance tax.
 

Site access
 

Non-domiciled individuals also need to consider how to hold on to their UK-sited assets. Any property situated in the UK is subject to UK inheritance tax. Consideration must be given to the right ownership structure for the UK asset as there are avenues available to avoid this tax charge.
 

Non-domiciled clients and those clients looking to avoid becoming UK resident will need advice on their residence status. This has been a minefield over the last few years with HM Revenue & Customs not being clear on what factors they look at when assessing someone’s residence status. However, on 17 June 2011 HMRC has looked to clear this up by issuing a consultation on residence that proposes a statutory assessment of someone’s residence status (see Private Client Adviser, volume 16 issue 10, October 2011).
 

Though this is yet to be law, it has provided practitioners with some clear guidance as to what HMRC looks at when assessing residence. For example, you are definitely non-resident if you were not resident in the last three tax years and have been present in the UK less than 45 days in the current tax year, or you have been resident in the UK once or more in the last three tax years, and spent less than ten days in the UK in the current tax year.
 

If you cannot meet the requirement, then you need to examine how long you have spent in the UK and combine it with certain factors. The more factors that apply, the less time you are able to spend in the UK. Factors include the presence of your spouse and children, accommodation in the UK, employment in the UK and time spent in other countries. It also depends on whether you are arriving or leaving the UK as it will be harder to become non-resident ?if you are living in the UK.
 

The international client will also need advice on the remittance basis as, if you are non-domiciled in the UK but resident in the UK, you need to understand that any income and gains offshore cannot be brought to the UK ?as they will be liable for UK tax.
 

Those non-domiciled individuals who have been resident in the UK for seven years will need to pay £30,000 a year if they want to still be taxed on the remittance basis, i.e. only on the amount of income earned in the UK and the amount remitted to the UK. The new consultation has proposed an increase in the remittance basis fee from £30,000 to £50,000 from April 2012, if you have been resident in the UK for 12 out of the last 14 years. This is a sharp increase for those longer-term UK resident non-domiciles and it will mean that one will need to have large amount of income or capital gains offshore to make claiming the remittance basis a viable option.
 

However, there is a welcome new relief to the remittance basis, as it is proposed that funds brought to the UK will not be taxed if they are used to encourage business in the UK. This means that a non-domiciled individual can bring non-UK sourced income and capital to invest in UK trading companies, or companies investing in the development and letting of property without incurring a tax liability. There will, however, be an array of anti-avoidance provisions to prevent having a direct benefit from the investment. For example, one will not be able to invest in a company owning a residential property that one lives in. It is also proposed that, once there has been a disposal of an investment, you must transfer the money out of the UK within two weeks.
 

The consultation also proposes changes that simplify the remittance regime for non-domiciled individuals; for example, suggesting a relaxation of the rules when bringing assets such as art and vehicles to the UK for personal use.
 

Moving on
 

In the UK, the law applies different rules for moveable and immoveable assets. Moveable assets are governed by the law of domicile, while immoveable assets are governed by the law of the country in which they are situated. Generally, all interest in land and property is classed as immovable including, for example, property, a mortgage and the goodwill in a business. Moveable assets include tangible items of property such as a bank account or chattels. Other countries will have different rules and one will need to check with an international client whether foreign law applies to some, or all, of the estate. This is especially crucial if the client dies intestate, or the jurisdiction that may apply has forced heirship rules that stipulate that certain family members can not be disinherited but must receive a percentage of the estate.
 

If there are assets in different jurisdictions a practitioner needs to consider whether there is a need for more than one will to be drafted in each of the jurisdictions. It is usual that if someone has property abroad multiple wills are required, which avoids the need to have a grant of probate resealed in different jurisdictions, speeds up the process and does not result in property being tied up in one jurisdiction.
 

The main risk to multiple wills is the potential of overlap or conflict with one another. For example, the wills may not dispose of a particular asset as the testator did not own the asset when the initial wills were drafted. There is also a real danger that a later will covering a jurisdiction is not drafted correctly and inadvertently revokes the earlier will.
 

Foreign lands
 

It is clear that when dealing with international clients you need to appreciate and consider the law in different jurisdictions. However, in most cases, UK lawyers cannot provide advice on foreign law. The main risk is getting the correct advice from all the potential jurisdictions and many clients will have lawyers in the foreign jurisdiction and will have already obtained the advice there. In these circumstances, you need to make sure that the foreign advice is competent and the advice given is based on a set of circumstances that takes into account the client’s overall tax position.
 

Specifically, there is likely to be a double-taxation agreement in place between countries that needs to be considered; the UK alone has more than 100 double-taxation agreements with various countries. The tax treaties are designed to protect the client against the risk of being taxed on the same income in both jurisdictions. This usually occurs when the individual can be seen to be resident in two countries and both jurisdictions feel they have a right to tax the individual. In these cases, you need to review the double-taxation agreement to see which jurisdiction takes precedent.
 

It is clear that there are numerous factors to consider with international clients and pitfalls that can occur in the advice that is given. A detailed look at all the client’s circumstances is key, as so many private clients now have an international element to their personal affairs, be it a question over domicile, a holiday home in another jurisdiction, or a child or family living or working abroad. A successful outcome for the international client means careful coordination of legal advice from different countries, a detailed history of the family and a clear view of the amount of time spent in particular jurisdictions. From this information the private client lawyer will be able to structure their affairs as tax efficiently as possible while taking into account their current and future economic needs and their social requirements. n
 

 

Saleem Sheikh is a senior partner ?and James Cohen an associate at ?GSC Solicitors

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