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Cross-border planning

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Overseas ownership of assets requires you to think carefully not just about taxation but about your estate planning. Eighteen-year DB resident Annette M. Houlihan takes an internationally informed look.

I have now been in Hong Kong almost 20 years and have met an amazing number of people during that period. I have lived on Discovery Bay for nearly 19 of those years, and one of the most common traits to everyone that I have met is the drive to progress and succeed with their lives.

While we are busy gaining wealth and a comfortable status, we accumulate assets – very often property and land. We need a ‘home’, so we have a main residence. We also like to buy houses, condos, boats and the like with some of the excess cash that we have… all in the different parts of the world that we travel to. Many of us are in mixed-nationality marriages because of this, or perhaps we have travelled somewhere to live because of our partner.

Before investing overseas, we check the current legal and taxation system under which we buy – stamp duties, property taxes and the like – but we rarely check the effect our premature demise or the potential changes in tax regimes could have on our investments.

Country of residence

Living in Hong Kong allows us the luxury of low income taxes, zero pension or investment taxes, zero capital gains and death duties… in fact, we pay out very little. But if we move back home or to a high tax jurisdiction, our houses, land and investments may cause a severe problem with taxes. The more we own, the more at risk we are.

For example, Spain introduced income tax for global assets in January this year, for those resident there for more than 183 days per year. This means that all of your assets are calculated and the income you receive, whether dividends, growth, rental, or pension, is added up and taxed up to 50%, depending on the amount. Many people have been buying retirement homes in Spain because before this January, Spain’s taxation was low and favourable. What will these people do now? (Britain would be cheaper to live in for a higher rate tax payer.)

In the UK, HM Revenue and Customs (HMRC) has raised over GBP8 billion in revenue from reformed taxes since April last year. While it has not touched income taxes, it has increased pension, death, wealth and capital-gains taxes. In some cases, it has also reduced allowances to ensure that higher taxes are paid. For example, the Lifetime Allowance on pensions (the amount you could hold) was GBP1.5 million in 2014 but this dropped to GBP1.25 million last month. Apart from potential taxes on your income, you could pay a further 25% in wealth tax – if you earn extra as a lump sum, this figure rises to 55%. (Pension Transfers (QROPS) is a valuable way to avoid this extra imposition as it takes it out of the UK loop.)

Mixed-nationality marriages can cause havoc with unintentional taxes. Wherever you buy properties or intend to live will require planning and knowledge; you need to know how to remove your wealth from Hong Kong and minimise the taxable effects in your new country of residence. Sometimes, you should plan to reside in more than one country; most allow 183 days or less as residence.

Death and taxes

Cross-border planning simply allows you to know if what you own is going to cause problems for you and/ or your loved ones in the future. The first step in this, through estate planning, is to have your will in order. This document gives instructions for who should gain your assets when you die and who will look after them, if need be, while distribution is being made. For those of us with minor children, it is particularly important to have some documentation in place.

You should not state where you want to be buried or cremated in your will but, by all means, detail the ceremony in your ‘letter of wishes’. This is because if you state where you want to be buried/ cremated, you are declaring that you want to return to that place. And this could affect your taxes.

Richard Burton, the actor, had been living in Switzerland for over 23 years when he died but when his will was opened, he’d stated that he wanted to be buried back in Wales, UK, even with the flag. This told HMRC that his intent was to return to the UK, so it charged his estate GBP2.8 million in Inheritance Tax (IHT). This could have legitimately been mitigated through proper planning.

Note too that although your country of choice may not be liable for death taxes now, these may be introduced in the future as tax regimes are tightening around the world.

Trusts and life insurance

If you want your estate distributed in a certain way – say income rather than chunks of money – you need to set up a trust, which details how your estate is distributed as well as to whom. If you are concerned with how your minor children receive funds, trusts allow you to direct information to your trustees. Note that trusts outweigh your will, as they do not have to go to court (probate) and can be instantly given out to beneficiaries.

Trusts are also exceptional documents for mitigating taxes in many situations. The British (UK domicile) are liable for IHT on their estates for anything over GBP325,000 at 40%. If the Brit is married to another Brit, this allowance increases to GBP650,000, as they both have the Nil Rate Band (NRB.) The NRB will stay the same until 2018, which means that if the value of your estate increases in the next three years, you will have more to worry about, not less.

For example, if your estate is worth GBP1 million (including home, life insurance and assets) then the IHT for your children would be GBP140,000 (GBP1 million – GBP650,000 x 40% = GBP140,000). This would have to be paid to HMRC through some means.

Using trusts to avoid some or all of the IHT is completely transparent when set up. Planning is required but this doesn’t have to be complex.

Note too that any life insurance you hold should not be in your own name. What is the point? This money is to be paid to your loved ones in the event of your demise, so you don’t need to own it. In some parts of the world, owning your own life insurance can cause a taxable event.

Again, the UK has IHT, so if you have your own life insurance it is paid into your estate when you die. HMRC will add up the value of your estate including life insurances. You should, therefore, have it made payable to your beneficiaries via a trust, or change the policyholder (if possible) to your beneficiaries. The money is then paid to them when you die, so it not calculated as part of your estate. Many people make the mistake of taking out life insurance on themselves and adding to the very problem they were trying to avoid.

Why accumulate wealth to have the Inland Revenue, wherever they are, collect it in taxes? Why not get yourself some good advice on cross-border planning, instead?

Frequently asked questions

– As a French resident, you cannot hold a trust in addition to your will. What is the alternative?

– Many children have a USA passport and one other. Will they be liable for US taxes when they start work, even if they have never lived there?

– Does holding a UK passport mean that you are liable for IHT?

– Most of Europe charges a global tax when you become resident. How do you mitigate the wealth that you have accumulated offshore?

– Are your assets, on return to your home country, taxable, either where you have left them, where you have moved to, or both?

Annette M. Houlihan, an 18-year DB resident, is managing director of Central-based financial advisory firm Carey, Suen & Associates. You can contact her at [email protected] for a no-obligation discussion, or call her on 2388 2331.

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