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Financially fit

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When getting your finances in shape for 2016, you’ll want to put your family’s future first. Annette M Houlihan reports

Moving into 2016, it’s time to consider building an emergency fund, setting up a life insurance policy and creating a will. The New Year is a fantastic time to finally check off those niggling financial to do’s that seem so insignificant now, but can affect you and your family drastically later.

Having your finances in order gives you the option to help your loved ones as and when they need it – just be sure to also look to the future and factor in taxation, and more specifically the effect of certain taxes, when you die.

Free to inherit
Many of us DBers are living in a globally connected world with mixed nationality marriages, assets or jobs overseas and children at international schools and universities. We need to be aware that this requires the authorities to have systems in place that record and report our activity.

When we buy a property, for instance, we are recorded on file with the relevant Land Registry. Therefore, anything we do that is connected to the property that alters ownership, for example sale, purchase or addition/ removal of names, is recorded with this particular government department. Sometimes, these actions generate a tax liability through stamp duty, capital gains or death/ inheritance taxes.

The UK, for example, has inheritance tax (IHT) which is 40% on the value above the nil rate band, currently GBP325,000 for a single person. For a UK domiciled married couple, this allowance is GBP650,000 and IHT is only payable (by heirs) when the second person dies. If your spouse is not from the UK, then the allowance is only GBP380,000 and your spouse will pay 40% on anything above. This is charged on worldwide assets – anything you own in any part of the world – and it does not exclude your main residence.

IHT is payable on any UK-held assets (wherever you are from) and by UK domiciled people. The latter is the hardest to understand as it is not connected to residence, nor being absent from the UK for a number of years. It is to do with where you are from, moreover where your father is from. If your father was a UK domicile at the time of your birth, it is more than likely that you are also a UK domicile, regardless of whether you have ever lived in the UK.

Another tax to watch is capital gains tax on property or land, which (in the UK) can be as high as 28%. If you are a UK resident, this is the tax payable on gains made from April 5, 2015 until the time that the asset is disposed of. If you are UK resident at the time of selling, you pay gains tax from the time you bought until the sell date. This could make a huge difference as to whether you want to keep the asset longer term.

If you have assets in the UK and intend to keep them, it is advisable to have them valued now. Disagreements could ensue in the future if the starting value is less than you want to confirm. Bear in mind also that the UK has introduced a new stamp duty on properties based on a buy-to-let basis. Stamp duty will now range from 3% to 15% for properties over GBP125,000.

The good news is that Hong Kong does not have any estate or capital gains taxes. But should you inherit a property or land from someone and have to change ownership of the title into your name, you will have to pay stamp duty. This could be as high as 8.5% for properties (or land) over HK$21,739,120. If you are not a Hong Kong Permanent Resident at the time, an additional 15% is charged.

In most of the US, estate tax is imposed on the transfer of the asset of the deceased. If you are American, the allowance is as high as US$5,430,000 but some States impose a tentative tax on a scale up to 40% on the first US$1 million. For non-Americans, this allowance is only US$60,000.

Canada does not have a death tax but when the deceased’s estate is distributed, it is seen as a sale, and may therefore be subject to capital gains tax. There are certain exemptions for spouses and common-law partners.

Most of Europe charges a form of death or succession taxes and these will depend upon who inherits as well as where. Spouses and children generally get a decent allowance before taxes are imposed. If you are a foreign investor, these taxes are charged on the geography of the asset but if you are a citizen and resident of your home country at the time, these tend to be charged on what you own globally.

Double taxation agreements between countries can prevent us from paying tax twice but only in certain circumstances. This depends upon the agreement and the tax concerned. Note that you may be in a situation where your estate pays capital gains or death taxes twice.

Where there’s a will
Making a will is the simplest way to start checking your liabilities, and it will give you an overview of who you wish to consider. From there, it is generally easier to arrange more complex estate issues, such as trusts or taxes.

To mitigate or protect the financial damage a huge tax bill could inflict on your remaining family and their future plans, be sure to factor in your life insurance and death-in-service benefits. These can have a nominated beneficiary to help speed up the distribution process but they may still be accountable within your estate for taxes, if the insurance is seen to belong to you.

Note that anything that does not belong to you cannot be counted as part of your estate. Very often, trusts are implemented for this reason as they remove legal ownership of assets. Anything in trust, as long as you are not the trustee, does not legally belong to you (although as one of the beneficiaries you may maintain equitable rights).
With all this in mind, it’s essential to understand your overall estate and any financial impact that could occur whilst you are living and when you pass away, and prepare. Remember you only have to do this once and then keep your details updated.

Jan 2016 cut out

Annette M. Houlihan, a 20-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.

Photos courtesy of www.wikimedia.org

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