Top tips for dealing with cross-border estates

An area of law which is often overlooked for its complexity is cross-border estate administration. It can be a difficult maze to navigate, and we are here to help make this easier for you at what can often be an extremely difficult time. 

Some of the key issues to consider are detailed below and, without being too morbid, tip number one is that it is much better for consideration to be given to these issues whilst the client is alive! 

Did the deceased leave a Will?

Hopefully, the deceased will have been advised during their lifetime to draw up a suitable Will. If so, there are several follow-up questions:

Do we recognise the Will as a valid testamentary document in the UK?

The UK is party to the Hague Convention 1961 which means that it will recognise an international will, if it complies with the formalities set out in that convention. We would also need to take advice in any other jurisdictions in which the deceased held assets to ascertain whether they will recognise the Will.

Do we recognise the content of the Will? 

Under English law international conflict of law principles, the succession to moveable property worldwide (essentially, everything other than real estate) is governed by the law of (common law) domicile of the deceased. Which jurisdictions could lay claim to the deceased’s common law domicile? Will they recognise the contents of the Will? 

The succession to immoveable property (i.e., real estate) is governed by the law in the country in which the asset is located unless there is a convention to state otherwise. 

In the UK, we have complete testamentary freedom (subject to potential claims made by disgruntled family members under the 1975 Act!). If, however, the deceased died domiciled or owning real estate in a civil law jurisdiction there might be forced heirship considerations. 

Does the Will contain a choice of law?

If so, will this be recognised by the relevant jurisdictions? Taking the EU Regulations as an example, Brussels IV is relevant to estates that have connections to the UK and an EU member state that is bound by it. Under these Regulations, it is possible for a person to choose the law of any nationality they have when making a Will to govern succession to their worldwide estate instead of their “habitual residence”.

Even if there is a Will, this may not deal with all the deceased’s assets.

Beware of jointly held assets, assets left under a binding nomination, assets held by a trust and/or assets left under the terms of a matrimonial regime or marriage contract.

The question the client really wants to know, to what extent will the estate pay IHT?  

If the deceased died UK domiciled/deemed domiciled, the PRs will be subject to IHT on the deceased’s worldwide estate. If not, the general rule is that the PRs will only pay IHT on UK-sited assets. 

The situs of an asset is decided by case law, statute and occasionally double taxation treaties, conventions, or agreements. The relevant rules will need to be checked for each asset type. 

The rate of IHT is currently 40% to the extent that a person’s chargeable estate exceeds their available “nil rate band” (currently £325,000). Various factors need to be considered, such as lifetime gifts, reliefs and exemptions which might be available and whether the estate can benefit from the transferable and/or residential nil rate bands. 

An often-invaluable point which is overlooked is whether any IHT planning can be carried out under s.142 or s.144 of the Inheritance Tax Act 1984. This could help some families to avoid IHT whilst also ensuring that the estate passes in line with their wishes and so it is always worth reviewing.  

Of course, in respect of cross-border estates, it will often be the case that other jurisdictions also have a right to levy taxes on the same assets. Again, this is where the non-UK lawyers come in!

If both the UK and another country charge inheritance tax, the estate could potentially avoid or reclaim some of the taxes paid through a double taxation convention. The UK has very few double taxation conventions in respect of IHT, however, if the estate suffers double taxation and there is no convention, credit could be given under the unilateral relief rules which offer up various formulas. Only when we have certificates of tax showing the taxes paid in the other relevant jurisdictions can we make a claim for relief, plus interest on the tax overpaid (again, often overlooked!). 

And finally, the compliance trap! 

It is also worth, briefly, touching on compliance. Despite completing an IHT return many estates will still need to register with HMRC’s estate register. Many clients do not realise this. 

In addition, you will need to ensure that the deceased’s pre-death and estate admin period tax liabilities are up to date, providing any beneficiaries with the necessary information to complete their own personal tax returns. Consideration will need to be given to any equivalent tax liabilities in other jurisdictions where the deceased held assets. This will all depend on the deceased’s and PR’s tax residency status. Another complex set of rules which are for a different article…. 

Finally, if one or more trusts are provided for under the terms of the Will (or the law of intestacy) there are additional UK tax and other issues to address. It really can be a minefield, especially with the ever-increasing compliance rules coming into play.