CROSS BORDER ESTATES

Increasingly, more and more of us own assets in other countries. These might consist of a holiday house in France or Spain, or shares or other investments held overseas. As the world shrinks, many of us work abroad at some time in our lives and then retain some wealth there. Marriages and relationships between people of different nationalities are also becoming increasingly common.

These situations give rise to complex issues of private international law, which more of us must face, understand and deal with. The interaction of doctrines in relation to the validity of wills, the interplay of relevant succession laws and the separate issue of taxation of gifts and on death, although difficult, have to be clearly thought through, if conflict, muddle and double taxation are to be avoided.

For the English reader, the concept of "domicile" may be well known. This is often the country of our birth, and although we may not be resident there at the moment, it would be the country to which we would expect to return in due course. Our country of domicile is the one with which we have the strongest ties and the one we would call home.

In other countries, however, this idea is completely foreign. The connecting factor used by such jurisdictions for tax and succession law purposes is invariably either that of nationality or that of actual residence. Immediately, it can be seen that conflicts of law will arise.

The use of the concept of domicile in the United Kingdom has meant that historically, people resident in the UK but not domiciled here, have benefited from special tax treatment. Although the Government declared earlier last year that it would be considering this issue and beginning a process of consultation with a view to implementing change, no changes have yet been made. Previously, in 1992 the Government abandoned such proposals after the realisation that they might damage the economy. The absence of any statement in Gordon Brown's November Green Budget last year was perhaps significant. "Domicile" is likely to be with us for a little longer.

Whilst it is well known that, in the UK, spouses inherit from each other free from inheritance tax, it is often not understood that this exemption does not apply in relation to a non-UK domiciled spouse inheriting from an UK domiciled spouse. In such circumstances the exemption is limited to the nil rate band plus £55,000, with the value of everything above these two figures being taxed at 40%. This limit has not been increased since 1982. This can be an extremely unpleasant surprise for many couples and whether it is right for the Government to discriminate between an English spouse and a non-UK but European Union spouse is yet to be considered. Awareness of the issue, however, does mean that steps can be taken to minimise the risk.

Property owned abroad causes problems in other ways. Houses and flats are often subject to local succession laws, which frequently include the concept of forced heirship. The UK idea of testamentary freedom is alien to civil law countries where children, or if there are none, parents, have a fixed right to receive a set share of the deceased's assets. In addition, taxation, often both on lifetime gifts or gifts on death are paid by the heir and not by the estate, with the rate increasing as the closeness of the relationship of the recipient to the giver decreases. Finally, although taxation abroad between a parent and child may be lower than in the UK, taxation between spouses and between siblings or unmarried couples will generally be higher.

Whilst, traditionally, the advice was to make a separate will in each jurisdiction where assets are held, this has never provided a complete solution. The taxation consequences in the UK of the overseas will, must still be dealt with. The need is to find a workable compromise to comply with the local succession law and also to minimise the inheritance tax payable in both jurisdictions. Good cross border advice is therefore vital.

If non-UK assets are owned or a member of the family has an overseas nationality, these issues need to be addressed and solutions found. Deferring the problem means that it is likely to surface at a time when the family is least able to cope with it. It would also prove much more costly in the long run.

Richard Frimston is Head of Russell-Cooke's Private Client department and deals with wills, probate, Court of Protection and trust matters.

This article first appeared in Barker Poland's XL magazine.