"What is Estate Planning?"

Estate Planning means giving some time and thought to what will happen to your money and assets (your estate) when you eventually die. Unlike the need to save for retirement or for the costs of educating your children which are self evident ie we know when they are going to happen so we know when we should start saving, we do not know when death will occur and death is something that we do not like to think about. Therefore planning for what may happen at this time is easy for us to postpone.

Unfortunately there is a price to pay for this postponement – Death Duties. In the UK it’s called Inheritance Tax, in the USA it’s Estate Tax while in France it is called Estate and Gift Tax. However, in the vast majority of countries around the world there are some form of Death Duties.

As an Expatriate you may feel that it’s not something that effects you but you may be wrong. This short guide may answer some of your questions and help you decide what is right for you.

"I’m from the UK but I live abroad so Inheritance Tax won’t effect me"

Unless you have already taken certain steps this may not be the case. Many people who leave the UK to work and / or live abroad think that they are not only leaving the lousy weather behind but also all of the UK Taxes.

It is true that the tax on some income or on any capital gains you may have may be avoided, but tax liabilities on you estate – i.e. inheritance tax (IHT) – is a lot more difficult to avoid. Firstly UK IHT can be based on your worldwide assets. i.e. If you used to live in the UK and move to Germany but keep property and assets in the UK, when you die the UK Revenue will want (if your estate is in 2005-6 over £275,000) Inheritance Tax on your UK and German assets.

The reason is that any potential IHT liabilities do not disappear when you leave the UK is because it is not based on your status as a UK Resident but on something called domicile.

"What is Domicile?"

Domicile is more permanent and a lot more difficult to lose than residency. If you leave a country for long enough you can lose your residency. Whereas, an individual is regarded as being domiciled in the country that is their permanent home. This reverts to the domicile of the country from which they originated if no permanent residency is established in a new country.

Anyone who has UK Domicile and has not taken specific steps to change their Domicile will be liable to UK IHT on their worldwide assets at death if any of their assets remain in the UK i.e. Anything they owned worldwide at their death, irrespective of where the money / asset may be and where they were living at that time, provided any assets remain in the UK.

It doesn’t matter that the individual is not living in the UK at the time of death, provided they have UK assets To have any chance of avoiding IHT, the individual must lose their UK domicile. This however is easier said than done.

To lose one’s UK domicile means you must not only leave the UK with the intention of never returning, but also they acquire a new domicile – “a domicile of choice” in another country. This means they must live in the new country and show it is their intention to live there permanently.

Even if you do manage to change domicile, ie getting rid of your original one for a domicile of choice in another country, there is a further problem. The IHT rules impose a UK tax burden on you by “deeming” you to be domiciled in the UK.

This means that you can be “deemed” to be domiciled in the UK even if you have lived elsewhere for 17 out of the last 20 tax years.

You will also be deemed to be domiciled in the UK for three years after ceasing to be "officially UK domiciled". So even if your intention when leaving the UK is never to return, you show an intention to live in the new jurisdiction forever, deemed domicile will keep you in the UK IHT net for another three years after taking your new domicile.

“I’m American/Canadian/French how does this effect me?”

U.S. Estate Taxes still apply to all U.S. Citizens wherever they live in the world and to all of their assets worldwide. So if you don’t take some advice, all your estate wherever it is in the world will be liable for Estate Tax when you die.

Canada doesn’t have an estate tax as above but they still get their share in certain circumstances when a person dies. In Canada there is a deemed disposal of any capital property, so any capital gains would be taxed at this time. Also there are Probate fees to be paid. The situation is further complicated as the rates charged can vary from state to state.

In France the rules are more complex on the disposal of Estates but the top rate of tax is 40% which is the same as the UK. So if you are French and now living abroad you really do need to take some professional advice. __________________next