Is Your Will up to Date? | Expats Portugal
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No better time to get your estate planning in order

Most people prefer not to think about their own mortality but the current coronavirus crisis has made that impossible. It is estimated that over 50% of people do not have a will and have made no plans regarding their estate. This leaves their loved ones vulnerable and unprotected. Surely now is a good time to sort that out?

For UK expats this is particularly important. UK-domiciled persons remain liable to UK Inheritance Tax (UK IHT) at a rate of 40% of the total value of their worldwide estate after lifetime allowances of around £325,000. IHT is penal, but it can be planned out.

Most British expats will remain UK-domiciled even if they have lived abroad for many years. They may also be liable to estate taxes in their country of residence and will almost certainly have assets that are liable to be charged to estate duties in their country of situs. This ‘triple-whammy’ could wipe out the entire value of an estate, but with proper planning all three can be eradicated.

Establishing domicile should always be the starting point for UK nationals. It is difficult to lose a ‘domicile of origin’ but, if a UK-domiciled person moves abroad and intends to remain there forever, they can acquire a new ‘domicile of choice’ in their new country of residence. The only legal test is one of ‘intent’ and that needs to be evidenced – buying a house, taking out permanent residency or nationality, joining local clubs and, just as important, cutting ties with the UK. Specialist advice, including UK counsel’s opinion, is strongly recommended.

Non UK-domiciled individuals can freely transfer assets into trust without tax consequence. This is good.  If their plans change and they leave their new country, they will automatically revive their UK domicile and become subject to UK IHT on their worldwide estate again. But the assets transferred into trust should no longer form part of their estate.

A trust is also a highly effective mechanism for organising your estate while you are still around to do it. The only other alternative is a will under which assets are transferred to executors on death. One way or another, assets have to be transferred to third parties who must be trusted to deal with those assets according to your instructions.

Will up to date

The disadvantage of the trust is that you lose control of your assets during your lifetime and pay annual fees to the trustees. On the plus side, however, you can personally oversee the process, there may be substantial tax advantages and your assets are protected from creditors, spouses, errant children etc. because they no longer belong to you.

A will is advantageous because you do not lose control over the assets during your lifetime, but the costs of administering an estate and distributing the assets may exceed those paid during lifetime to the trustees. And most tax planning opportunities will be lost.

Trusts cannot readily be used by UK-domiciled persons because the transfer into trust attracts a charge to lifetime IHT of 20% of the capital value of the assets. This is deeply unattractive. But other planning opportunities exist and the family investment company (FIC) is one of the effective. Assets are transferred to an offshore or UK company (the FIC) in which the rights and obligations attaching to the shares are divided between those carrying a right to vote, those carrying a right to income (dividends) and those carrying a right to the underlying assets (capital).

The transferor can retain the voting shares and therefore control of the assets and the affairs of the company. They can also retain some or all of the income shares so they can receive dividends and an income during lifetime. The capital shares, however, are immediately or progressively given away to family members as a Potentially Exempt Transfer (PET). This means that provided the donor survives for three years after the transfer, the taxable value of the gifted property will be reduced by 20% each year. At the end of the seventh year, there is no tax to pay at all.

UK-registered pension schemes now also benefit from a specific exemption from UK IHT (IHTA 1984 s151(1)). This exemption also extends to certain types of overseas pension schemes, known as Qualifying Non-UK Pension Schemes (QNUPS). QNUPS can be set up in Malta or Guernsey.

What is clear is that doing nothing should not be an option. The worldwide disarray created by the pandemic is a timely reminder that while there are many things beyond our control, we should do all we can to solidify and structure what we can control by getting our financial affairs in order. This is essential to ensure peace of mind and prosperity, not just for yourself now but for those you love long into the future.

This article focuses mostly on UK nationals but, with our global office footprint, Sovereign is equipped to guide and advise clients in most countries. Email to serviceinfo@sovereigngroup.com for more information or visit our website www.SovereignGroup.com to see how Sovereign can help!

By Howard Bilton, Chairman and Founder of The Sovereign Group

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