As Brodies partner Susanne Batchelor prepares to visit Cyprus next week for the STEP Europe conference, Senior Solicitor Stewart Gibson blogs on the importance of considering the international aspects of our clients' personal affairs.

Benjamin Franklin was the original author of the now famous line that "in this world nothing can be said to be certain, except death and taxes". Theobservation was made by Franklin in a letter to the French scientist Jean-Baptiste Le Roy in the late 18th century, and is now much quoted by pessimists and tax professionals alike. But what might Franklin have written if he had not only friends, but also assets, in France? I like to think it might have been something like "in this world nothing can be said to be certain, except death, and taxes in the US and maybe also taxes in France, which may or may not mean we get some of the US taxes back".

For UK domiciled clients with assets in other countries, it is important that they consider and understand how their 'non-UK' assets will be taxed on their death. Cross border taxation is unavoidably complex. The basic rule is that UK inheritance tax ('UK IHT') is payable on the worldwide assets of UK domiciled individuals. So if you are UK domiciled, but have a holiday home in Cyprus then that property is caught by the UK IHT net. What happens then if the law in Cyprus says that the property is subject to a Cypriot tax when you die?

Your executors may be able to claim relief from UK IHT in the form of unilateral relief, which provides a credit against the UK IHT equal to the tax paid in Cyprus. If you have assets in a country with which HMRC has a bilateral double taxation convention, then your executors may be able to rely on that to claim relief. However, of the 195 countries in the world, the UK has double taxation treaties with only the Republic of Ireland, South Africa, the USA, the Netherlands, Sweden and Switzerland, in addition to some older treaties with France, Italy, India and Pakistan. There are therefore a huge number of countries where your executors may have to rely on unilateral relief from inheritance tax, to ensure that your estate did not pay tax twice on the same asset.

The application of unilateral relief and double taxation conventions to an estate is complicated. For example, the nature of the assets may give rise to a dispute about where the asset is situated. Unilateral relief from UK IHT is only available on assets located in another country. For IHT purposes, UK law determines the location of the asset and therefore whether it is eligible for the relief. Of course, UK law may not accord with local law. It is not therefore inconceivable that your executors may find themselves in a position where the UK and another country both consider the assets to be located in their country for tax purposes, and both want to tax it accordingly without providing any relief.

The position can be complicated further where assets are physically located in another country but are treated as being taxable in the UK, whether by virtue of a double taxation convention or otherwise. Your executors may then have a UK IHT liability to fund (which is due to be paid within 6 months of the date of death) but they are unable to access the assets in the other country that quickly in order to raise the necessary funds for the tax bill.

We have encountered that very scenario in the past and, while there are funding options available, the best way to protect your executors from these pitfalls is to make sure you are prepared by taking proper advice on the matter during your lifetime. Often this involves your advisers in the UK and abroad working together.

If you have assets abroad and think that IHT is a concern for you then please do get in touch with me or Susanne to discuss. She has promised she is going to come back from Cyprus...


Stewart Gibson

Senior Associate