Late last year we presented our Brodies Personal & Family Academy and covered the topic of individuals with foreign connections. With many people working overseas and buying property abroad, there are some key points that should be considered if you, or a loved one, has a foreign connection.
1. Domicile
Broadly speaking, a person's domicile is the place where they have the closest connection, and it is only possible to have one domicile at one time. It can determine (amongst other things) the tax and succession regime applicable on death and it becomes important when there are connections to multiple countries/jurisdictions. The most common types of domicile are domicile of origin and domicile of choice.
- A person will have a domicile of origin, which they acquire at birth, and which is broadly the same domicile as their parents (and usually that of their father).
- It is possible for a person over the age of 16 to acquire a domicile of choice if they physically move to a new country and have a fixed and settled intention to give up their previous domicile and live in the new country indefinitely.
The importance of domicile feeds the effect this has on forced heirship rules, succession, and inheritance tax.
2. Forced heirship
If you are Scottish domiciled at date of death, their estate would be subject to forced heirship rules, known as "legal rights". It is also worth noting that forced heirship rules apply in some other countries, for example, in France, the children are the reserved heirs of their parents.
3. Inheritance tax
One of the significant implications of domicile is that it will inform the tax regime that will apply to individuals both during lifetime and on death.
If an individual is UK domiciled at the date of their death, their worldwide estate will be subject UK inheritance tax (IHT) on death. If an individual is not UK domiciled at the date of their death, UK IHT will only be payable on their UK assets.
In the UK, the spousal exemption can also be very useful in estate planning exercises, but depending on the domicile of each spouse, it may not always be unlimited. Transfers between two UK domiciled spouses or civil partners on death or during lifetime are exempt from IHT and transfers from a non-UK domiciled spouse to a UK domiciled spouse on death or during lifetime are fully exempt from IHT. However, where the transfer is from a UK domiciled spouse to a non-UK domiciled spouse, the spouse exemption is capped at £325,000. That is fine.
In some circumstances, there may be merit in the non-UK domiciled spouse electing to be treated as domiciled in the UK for IHT purposes, either during lifetime or on death. Careful consideration needs to be given to this election and advice should always be sought, not least because the election is irrevocable for as long as the elector is a UK tax resident.
When there are connections with, or assets located in, different countries, it is also possible that assets in the deceased's estate could be subject to UK IHT and also the foreign equivalent of IHT. The UK has entered into a number of Double Taxation Conventions with other countries which operate to mitigate potential exposure to double taxation.
4. EU Succession Regulation
We have previously blogged about the EU Succession Regulation and how this can have an effect on the succession of your estate if you own property abroad. The EU Succession Regulation allows you to make an election that Scots law would apply to the succession of your worldwide estate. However, this requires careful consideration if there are multiple wills.
5. Multiple wills and powers of attorney
There can be situations where it is administratively easier to administer an estate following death to have more than one will (e.g. one will for your country of domicile [e.g. Scotland] and another for the country in which you have a foreign connection [e.g. a holiday home in Spain]). If there are multiple wills at play, care is required to ensure that the wills work together and neither revokes the other. Advice should always be sought to determine the best approach.
There can also be situations where multiple powers of attorney in different countries can be beneficial. The UK ratified the international convention on powers of attorney and, therefore, Scottish powers of attorney may be recognised in other countries who have also ratified the convention. There can be difficulties with having Scottish powers of attorney recognised abroad and having foreign powers of attorney recognised by organisations here.
Foreign connections can cause some complexities and there are issues to consider in respect of both lifetime and death planning. Careful and considered advice is always recommended. If you have any questions, please get in touch with your usual Brodies contact.
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