Duty-bound: a second coming of estate duty

PUBLISHED : Sunday, 30 January, 1994, 12:00am
UPDATED : Sunday, 30 January, 1994, 12:00am

THE recent article on domicile and its impact on Britain's Inheritance Tax provisions provoked a strong response from readers.

First, in response to one query, the inheritance tax on GBP1 million would be GBP340,000. The calculation is as follows: GBP1 million minus GBP150,000 (0 per cent allowance).

Remaining GBP850,000 multiplied by tax at 40 per cent equals GBP340,000.

Net proceeds from estate leaves GBP660,000.

The treatment of a non-domiciled spouse is harsh and that is why Money Matters highlighted this often overlooked tax planning point because, with the right advice, much of the problem can be avoided.

The three major exclusions from inheritance tax are: The first GBP150,000 of your estate.

Anything you can give to your spouse provided that he/she is also British domiciled.

Bequests to registered charities.

There are other exclusions, but they are minor and do not include property.

The mechanics of inheritance tax collection are that the Inland Revenue (IR) takes its share from the estate before probate is granted. None of the assets of the estate can be distributed to the beneficiaries until this procedure - probate - is completed, which means that the IR gets priority over the deceased's assets.

From a practical point of view, collecting the tax can be very difficult if the person in question is British domiciled but dies overseas without any assets in Britain.

However, the IR may have an idea of what taxes are due and this could result in the beneficiaries of the deceased having to undergo regular and potentially awkward tax audits and checks.

As for the question of whether the authorities would be able to discover what assets lie where, the answer is: probably not if they are situated outside Britain.

Although in practice it may be difficult for the IR to locate assets overseas, if your estate is large enough for them to believe it is worth their while to investigate the matter, and should the executors be found to have been not entirely honest, then the consequences for the next generation of the deceased could again be quite drastic.

Once you have been earmarked by the IR as a possible tax evader, every subsequent year you complete a tax form in Britain, it is likely to be subject to special scrutiny. This can be extremely uncomfortable and may give rise to excessive accountancy feesfor many years to come.

In response to another query, contrary to many people's beliefs, Hong Kong also has death duties which may be levied on all assets situated in the territory. ''Estate duties'', as the tax is called here, are only charged on assets located in Hong Kong. This may include shares, property, and even life assurance plans.

Again, expert advice should be sought; simply transferring your assets to an offshore company, for example, may not work because of the ''controlled company rule'', which broadly takes a practical view as to where the company in question is controlled.

Hong Kong estate duties can also be quite hefty. The tax starts to bite at only $5 million. Thereafter, $5 million to $6 million is taxed at six per cent; $6 million to $7 million at 12 per cent; and above $7 million at 18 per cent.

Therefore, if you own a property in, for example, the Mid-Levels, you are probably already in the Hong Kong estate tax bracket.

To take an example: you have property valued at, say, $8 million; minus a loan of $1 million; plus Hong Kong shares of $2 million.

Your total Hong Kong-located assets add up to $9 million.

You would be taxed on: the first $5 million at zero per cent; the next million at six per cent - $60,000; the next million at 12 per cent - $120,000; the remaining $2 million at 18 per cent - $360,000.

So the total Hong Kong estates duties bill will be $540,000.

Clearly, estate planning is needed for those who are resident in Hong Kong or have assets here.

A considerable amount of interest was also generated by the question as to whether certain people who have been living in Hong Kong for a considerable amount of time are still in fact British domiciled.

One reader pointed out that it is possible to check this without dying first. The method used is rather complicated, but in a nutshell it involves establishing a trust and giving money, in the form of a gift, to that trust. However, responsible advisers will only use this method if they are convinced that you are non-British domiciled.

The gift should be greater than the inheritance tax threshold (GBP150,000). Once this has been done you can apply to the IR for confirmation that, as you are non-British domiciled, no inheritance tax is due there and then.

Expert advice is again strongly recommended because not only is it complicated but once, and if, you succeed, the decision is not permanent. Remember that you can easily re-acquire your British domicile at a later stage if, for example, you choose to return to live there.

If you have any queries or practices you wish to have answered or investigated, please contact me confidentially by facsimile on 565-1423.