In this series we discuss the opportunities, trends and challenges that Brodies' experts experience when working internationally.
In this episode Brodies' private client solicitor, Nick Marshall, is joined by Lynn Gracie, Private Client International Tax Director at AAB. From what is meant by "assets abroad" to the powers of HMRC, together they discuss the key considerations for succession planning when you hold international assets.
The information in this podcast was correct at the time of recording. The podcast and its content is for general information purposes only and should not be regarded as legal advice. This episode was recorded on 14/12/2022.
David Lee, Podcast host
David Lee hosts Podcasts by Brodies. David is an experienced journalist, writer and broadcaster and he is also the host of 'The Case Files' and 'What do I do if...' podcasts by Brodies.
00:00:05 David Lee, Host
Hello and welcome to ‘Podcasts by Brodies’. My name is David Lee and in this series, we'll be discussing the opportunities, trends and challenges that Brodies experts experience when working internationally.
Brodies lawyers are globally connected experts in their fields, advising clients across all key sectors from real estate to education, energy, food and drink, life sciences and personal and family matters. Today we discuss assets across borders, international tax and succession.
Welcome to you both. Nick, let's just start off with some simple definitions. What do we mean, first of all, by assets abroad? Can you give us some examples?
00:00:59 Nick Marshall, Partner
Yes, I think this question is quite closely linked to why people have assets abroad and the one that we come across commonly is the holiday villa or the holiday apartment abroad, commonly Spain, Portugal, France.
Essentially, people own assets abroad, all sorts of assets, the same type of assets that they would own in in the UK. As I said, we often see the holiday villa or timeshare, but we also see pension pots of differing sizes, bank accounts and other investments. It's a whole wide range of assets really.
00:01:42 David Lee, Host
If you can just give us a bit more detail about the circumstances in which a person might find themselves with assets abroad.
00:01:51 Nick Marshall, Partner
There's a number of different reasons really, and one might be leisure or recreation. Coming back to that idea of the holiday villa or the timeshare abroad, work is a very common reason, so people tend to move around more through their employment these days and so they might set up a pension when they're abroad with work or they might invest in something when they're abroad with work.
Then of course, they end up back in the UK and they still have all these assets out in other countries that they haven't brought back home with them when they've finished on secondment or whatever it may be.
People inherit assets in different countries, and the other obvious one is for tax purposes or investment purposes, there might be a particular reason, and that might be advice lead as to why somebody should invest or have an asset in a in a different country.
00:02:46 David Lee, Host
Lynn, if I can come to you, simple question again, do individuals have to declare assets abroad?
00:02:55 Lynn Gracie, Private Client International Tax Director, AAB
Perhaps surprisingly, to many, even if someone is resident in the UK, then from a UK tax perspective the answer is actually no.
There is no specific tax requirement to formally report overseas assets as such to HMRC. But if those same assets generate income or gains, for example, on sales, or if they've got bank accounts with interest, then HMRC in the UK would very much expect a UK resident person to report those same sources on a UK tax return. Exactly what and how much to report will very much depend on the sources involved plus the individuals tax residents and possibly their UK domicile or non-domicile position as the case may be.
00:03:44 David Lee, Host
If an individual didn't declare them, how might HMRC find out about overseas income or assets?
00:03:53 Lynn Gracie, Private Client International Tax Director, AAB
I think a lot has been said in the press about this, but effectively for the last three to four years HMRC have never had as much information about overseas assets as they do now.
The common reporting standard - or the CRS agreement - that's been reached globally means that there's more than 100 jurisdictions who are now effectively transferring financial information about individuals across all different jurisdictions. So HMRC will be sitting in possession of billions financial records relative to UK resident individuals who hold overseas assets.
There's a definite connection now being made, and there has already been some action by HMRC in the last couple of years, issuing, for example, nudge letters to individuals who perhaps have got those overseas income and assets, but they haven't declared them for whatever reason. It could be innocent error or not on their UK tax returns.
So those connections are effectively being made and it is just very important to consider the reporting aspects if you do have these types of income sources overseas.
00:05:14 David Lee, Host
That's a great title, "nudge letter." That's two very simple sounding words with a lot behind them.
Just how common is this Nick? How common is it for people to have assets abroad? Let's say, in Scotland, do you know how many individuals we’re talking about roughly?
00:05:34 Nick Marshall, Partner
It's a pretty difficult thing to quantify. Whether it's common, I'm not sure I’d go that far yet, but certainly in terms of personal experience and anecdotally talking to colleagues and people like Lynn and other advisors, there is more and more of this type of stuff.
The international work that I would get involved in wouldn't just be because somebody is sitting in Scotland or England and has an asset in the UK, it might be the other way around, they might be living in a different country and have an asset in Scotland, or there otherwise might be some connection with the UK. So there's family, there's fleeting residents, and there's a whole host of reasons as to why Brodies might get involved on an international succession piece.
So, a difficult thing to quantify but these things do land at my desk on a weekly basis and that is an increasing trend for sure.
00:06:34 David Lee, Host
Lynn, what about taxation? Taxation is set up differently in different countries. How does this impact on individuals who have assets abroad?
00:06:44 Lynn Gracie, Private Client International Tax Director, AAB
It's definitely the case that all jurisdictions have slightly different approaches to how sources of income and gains and assets are taxed, plus very inconveniently, the UK fiscal tax year doesn't align to most other countries tax years as well, which is usually the calendar year.
The tax position connected to reporting overseas sources can throw up some unexpected results, offshore investments or assets may be viewed very differently by HMRC according to UK tax rules. For example, interest from a mutual bond in the US is tax free there, but not so in the UK. An overseas pension, may not be seen as a pension according to the UK definition by HMRC. A frequent misconception is that many believe if something is taxed overseas as well, then it shouldn't be taxed in the UK, however, in many cases sources can be subject to tax in both countries. Another example we see - bank interest which has perhaps withholding tax paid in the foreign country. But irrespective of that local tax being paid, the interest is still reportable in the UK if you're a UK resident here, but you would be able to claim a credit for the foreign tax paid against your UK tax.
There's just fundamental differences in how overseas sources are taxed. So assuming that you're a UK resident and subject to tax on worldwide income as a consequence, this can lead to very different tax exposures, which many may not appreciate necessarily.
00:08:21 David Lee, Host
What's your broad advice for individuals who find themselves in this kind of situation? Particularly those who may be hold assets in multiple jurisdictions.
00:08:33 Lynn Gracie, Private Client International Tax Director, AAB
If those assets are income producing, then expect to be under an obligation to submit and report in all of those same jurisdictions. It might not be that you have to, but I suppose the starting point is that there's an expectation, almost certainly that you will have to.
The associated tax treaties in place, double taxation agreements and treaties in place between countries, will almost certainly be key in determining who has primary taxing rights relative to various sources. But an approach is to initially assume that the starting point is that the UK can and will tax those sources if you're resident here, whilst funds earned or accumulated outside the UK while non-resident, can perhaps be ring fenced after moving to the UK.
Many don't appreciate that income or gains generated from those funds thereafter becoming resident here will be taxable in the UK and that becomes much more complex as well if you're not UK domiciled because there are some tax exemptions, or if you claim remittance basis, for example as a non UK domiciled individual. But perhaps that's a podcast for another time because that's quite a conversation to be had, and it's very relevant right now!
00:09:56 David Lee, Host
This is a complex area, Lynn, what if somebody does realise that there is this historic income or assets that should have been declared but weren't, what's your advice then?
00:10:08 Lynn Gracie, Private Client International Tax Director, AAB
We would always recommend that a full review of the tax position is carried out just as quickly as possible to readily identify the extent of any undeclared income or gains.
Assuming that there are sources to report, it could be innocent, it could be just somebody just didn't appreciate that there was a reporting requirement. It's just so important to voluntarily come forward and make a formal application to disclose to HMRC just as soon as possible. It is always better to volunteer to disclose in the first instance rather than wait for HMRC to catch up with you because then you're just asking for much higher penalties.
Also volunteering and coming forward would mean perhaps that you're in a position to limit the number of tax years to go back and look at. You might be able to limit them to six or eight years rather than 20, for example, that does depend on the background and the circumstances.
It will potentially reduce final penalties and any unpaid tax as well and when it comes to offshore tax matters, that is incredibly important because the starting point relating to penalties for non-declaration of overseas income or gains, for example, is 200% of the tax payable. It is a very significant penalty, and HMRC, to put it bluntly, take a dim view of people not coming forward and not disclosing in the first instance that's why they've got such a high penalty in the first place.
00:11:40 David Lee, Host
You preempted my question there about what the penalties can be, so that just reflects back on your advice - when you find out something, report it quickly, don't just forget about it and bury your head in the sand.
00:11:55 Lynn Gracie, Private Client International Tax Director, AAB
I would say make sure that you, and of course I'm biased, because I'm an adviser in this field, but really do seek out professional advice and advice from somebody who's got that experience of dealing with these types of matters and the experience of dealing with HMRC as well.
00:12:11 David Lee, Host
Nick, obviously these assets may at some point pass on to another member of the family or whatever, so, what are the considerations in terms of succession regarding assets over?
00:12:26 Nick Marshall, Partner
I would echo a lot of what Lynn said there about take advice and take advice at the earliest possible juncture so try and be proactive and proactively plan rather than reactively plan. Of course, when you're talking about succession, you kind of have to be proactive.
The first thing I would say is have a will, or wills, and that's a separate conversation as to whether you need a will in each of the countries, you may or may not, depending on those countries, but certainly have a will. If you die intestate (without a will) then you're effectively leaving it to the law of the land - or the lands if you have an international estate - to determine who benefits, when they benefit, how they benefit, what the tax implications are. And what you're almost certainly doing is making the estate administration much more complicated and therefore much more expensive and therefore reducing what your ultimate heirs are going to receive.
A lot of people make this a big thing in their heads, ‘this is a really complicated thing, I just can't bring myself to take advice,’ but ultimately, it's for the advisor to cut through the complexity. What I would say to people is get on and get a will in place and take advice around it because it doesn't have to be a really complicated will, but having a will will almost certainly take you into a better place overnight, rather than not having one.
In terms of the specifics for people to think to about in advance of that meeting, who are the beneficiaries to be? Who does somebody want to benefit from their estate? Who are the executors going to be? So that's the people who will administer the estate and pass the assets on to the beneficiaries. Are trust provisions required? Maybe because the beneficiaries are young or otherwise financially immature or vulnerable subject to potentially other external influences in their life. Might it be sensible to wrap a trust around somebody's inheritance? How are title to the assets held? So if there's property in another country, how is that title actually held? Is there anything within the title which would pass it on to the other title owner?
Irrespective of what a will has said, these are the kind of main issues to really think through, and of course tax position, which is something that is advisor lead. But what is the tax position going to be on death and who's going to bear the tax liability? Which of the beneficiaries is going to bear that?
Those are the main things to think about, but as I say it's for the advisors to cut through that complexity really. People should just be thinking first and foremost, I need to meet with somebody to start the ball rolling on getting that advice.
00:15:12 David Lee, Host
You said that if you have a will in the UK it will depend which country you have assets in, and whether it has the level of significance it has. What about some of those common places where people would have assets and property like Spain or France?
How useful is the UK will in passing on assets in countries like that?
00:15:37 Nick Marshall, Partner
Very, is the short answer! As to whether a Scottish will or - we talk about "UK wills" and I talk about "UK wills" as well in an international context, but it's a bit of a misnomer really because Scottish law is entirely different to the law of England and Wales.
I get asked this question a lot, does a Scottish will or an English will, govern somebody's worldwide estate? I'm afraid the answer depends, which is such a such a lawyer's answer, but it will take you into a better place and obviously as a dual qualified UK lawyer, I can only advise on the law of England & Wales and Scots Law.
So what we would be looking to do is to put a Scottish will, or an English will, in place for a client and try and introduce them to an advisor in the other country, just to get that holistic planning and to get that peace of mind.
It may very well be that the one will, the UK will if you like, is sufficient, but we'd want that clarity and that comfort wherever those other assets are. If the assets are in France, or Spain, because we're dealing with these assets a lot, we have a good sense of how that is going to play out and we have pretty good contacts there as well that we deal with on a regular basis.
00:17:03 David Lee, Host
What about power of attorney? Nick, is a power of attorney important and does that work internationally?
00:17:10 Nick Marshall, Partner
Power of attorney is a slightly separate thing from a will so whereas the will governs distribution of somebody's estate when they die, a power of attorney is a lifetime document that allows trusted people, your attorneys, to make financial and/or welfare decisions on your behalf should you be unable to do so. That covers a whole spectrum of reasons, from not being in the country to sign a document through to being in an accident, or dementia - losing the ability to deal with your own affairs.
Traditionally, power of attorney is thought of as being a document that only elderly people need in relation to something like dementia, but the reality is that, in my view, power of attorney is every bit as important as a will, everybody should have both a will and a power of attorney. It doesn't have to be something that's really complicated, it's just that insurance policy, it's that peace of mind to get these documents in place, put them in a safe, diarise to review them and go on about your lives but certainly have them in place.
As to whether they work internationally, again, I'm afraid it depends on which countries you are talking about, but the reality is when you boil it down, the likelihood is that the advice will probably be that if you live in Scotland or the UK that you have power of attorney here, and if you also have bricks and mortar in another country that you probably have a power of attorney in that country as well. These things can be put in place without huge cost, as I say, they just give you that peace of mind.
The final thing I would say is if somebody does have multiple powers of attorney, what's really important is that there's a mirroring of the attorneys and the terms of the document. So what you don't want is attorneys ABC in one country and attorneys DEF in another country and they have a dispute as to what's in the best interest of the person. So that we certainly wouldn't recommend, but yes, power of attorney is as important as a will in my view, and as I say again, it's about speaking with advisers in other countries and getting that holistic planning in place.
00:19:23 David Lee, Host
You've done the planning Nick, but obviously at some point people will die. They die, owning assets in another country, is it what you've said before, depending where those assets are, the procedure will differ in those different countries?
But having these legal documents back in Scotland or the UK will make a big difference to actually how easy it is then to deal with everything?
00:19:47 Nick Marshall, Partner
Absolutely, so the idea is that you get ahead of that, and you proactively plan in all of the countries and that will make the estate administration process much quicker and less expensive.
There are significant differences in terms of how countries approach these things. In very general terms, the common law countries where the laws derived from judgement and case law will treat the administration of a state very different from civil law countries where the law is more codified, whereas in the former you will have an executor who's responsible for administering the estate and passing it on to the beneficiaries.
In the latter jurisdictions, they tend not to recognise that role, so when somebody dies, the assets vest in the heirs. So something like that is such a fundamental difference as to how you would administer an estate which is why if somebody dies without a will in place, you just immediately have these conflicting ideas of how an estate ought to be administered across the countries. Whereas if you have a will or wills in place which is already road mapping how all of that is going to play out.
As I say it's much more straightforward, in very general terms, if state administration looks like ascertaining the assets and liabilities of the estate, reporting to the tax authorities, obtaining a power or an order from the courts to deal with the deceased assets, settling any debts and liabilities of the estate and then passing the net estate on to the beneficiaries.
That's what estate administration looks like, but as I say, because no two countries are alike, you want to plan ahead in lifetime and not just leave that to your beneficiaries and your executors to deal with.
00:21:41 David Lee, Host
Nick, we'll come back to you for some final comments in a moment. Lynn, just one other area we can cover, what's your advice to somebody who's buying or selling assets in another country? That's another big issue.
00:21:54 Lynn Gracie, Private Client International Tax Director, AAB
I would always say never acquire overseas assets without considering the tax position in both the jurisdiction in which the asset is held and where you actually are tax resident. And definitely seek out appropriate, professional advice in each country to ensure that you are 100% aware of what this might mean in tax terms, not just the short term, but the longer term as well.
Ideally reach out to an agent, as Nick suggested, that can deliver that global and holistic tax position across all the jurisdictions involved.
We're a member of a global network as well, so that works really well in terms of ensuring that we get the tax advice from the people with the feet on the ground in the jurisdictions themselves, and we can join that up with a UK piece as well. Clients really do appreciate that because they get the holistic perspective which is so important because what is tax efficient in one country can be very tax nasty in another.
So it's not just, as Nick suggested, advice connected to the income generated in your lifetime but also what will happen in the event of your death to these assets and the income that goes along with that and future wishes to give those assets to your family, which most people hold very close to their heart so why wouldn't you get that advice when you're investing significant sums in assets overseas?
Knowledge is power, as they say. It's just so important to understand what it really means for you and potentially your future family as well.
00:23:33 David Lee, Host
Now this is clearly a complex area, particularly if you're holding assets across multiple jurisdictions, what's your final bit of advice, Nick and then Lynn, to anyone who finds themselves in in this position with assets abroad and with the potential complexities of dealing with that?
00:23:58 Nick Marshall, Partner
I would just say take advice at the earliest juncture and take advice from somebody who has a track record of advising in these matters. Some of it can be quite niche, international planning, and the earlier the advice is sought the better.
I fully appreciate nobody particularly likes thinking about their own mortality or incapacity, let alone paying a lawyer to think about but it doesn't have to be this really complicated, drawn out process, it can be straightforward and the likelihood is the planning that's put in place in life is going to make everything much easier down the line.
One other thing, in conjunction with putting the right documents in place, the will and the power of attorney and planning, the other thing to think about in life is consolidation. Quite often we see clients who've worked all around the world and have a little pension pot in each of the countries where they've worked, and actually the answer might just be consolidating assets - subject to taking the requisite tax advice from Lynn and her colleagues.
And affordability, does somebody need assets in five or six countries? Might the answer just be to consolidate everything down and really simplify their affairs.
00:25:25 David Lee, Host
Lynn, final word from you.
00:25:28 Lynn Gracie, Private Client International Tax Director, AAB
I agree with everything that's just been said. Taking advice is top of the list there and appropriate advice, but I think that there's a background here, in terms of reporting from a tax perspective on offshore assets, and that is that the offshore tax gap is now clearly a priority for the UK Government and HMRC and they're set to release an estimate of what that offshore tax gap might be in 2023. Given the UK's current economic situation there is a clear political motivation to crack down any perceived offshore tax evasion.
Our advice is just be very careful, get the right advice, make sure that you're reporting correctly, it’s absolutely imperative and get the advice from experienced professionals.
00:26:20 David Lee, Host
Thanks very much to Lynn and Nick. Who better to have as a guest to discuss "assets across borders" or "AAB" than someone from AAB. Thank you to Lynn and thank you to Nick for being part of Podcasts by Brodies.
In Podcasts by Brodies, some of the country's leading lawyers and special guests share their Enlightened Thinking about the issues and developments impacting the legal sector and what that means for organisations, businesses and individuals across the various sectors of UK economy and society.