Seek advice or end up turning in your grave

MONEY Matters has frequently made reference to the principal of caveat emptor - when it comes to financial planning advice, buyer beware.

For most individual investors, the most sensible way to double check advice is, of course, to get a second opinion from another financial adviser.

It appears Money Matters should have followed its own advice! In this column two weeks ago (Sunday Money, January 30), the issue of Hong Kong Estates Duties was raised.

Advice was taken from a company that works in the area and an error was made - namely, the assertion that Hong Kong Inheritance Tax is not cumulative.

In fact, a person's estate is taxed as a whole, after deductions, at the band into which it falls.

In the example used, tax on an estate totalling HK$9 million after all deductions was calculated at $540,000.

In fact, the total $9 million would be taxed at 18 per cent, giving a figure of $1.62 million.

I am grateful to Adrian King of Tyndall F K Corporate Services who has kindly furnished Money Matters with an extensive report on Hong Kong Estate Duty.

Clearly, a tax of 18 per cent on the whole estate concerns not only the wealthy. The huge rises in property prices in Hong Kong mean the whole property-owning class is affected.

Based in principal on British legislation, the tax was first introduced by ordinance in 1915.

Gifts made three years before death are brought into the calculations, but this applies only to assets in Hong Kong and there are various exceptions.

The major ones are: donations to charities; matrimonial home exemptions, providing that the surviving spouse lives on the property; and debts.

One of the principles of Hong Kong Estate Duty concerns the location of the asset at the time of death.

If property is outside Hong Kong at the time of death, it is not chargeable.

For instance, tax on bank balances usually depends on the branch where the account is kept.

Likewise, tax on coins and notes (irrespective of currency), depends on the country in which they are kept.

Tax on registered shares depends on where the register is kept.

Tax on partnership assets, regardless of the location of individual assets, depends on the location of the partnership's business headquarters.

For life insurance policies executed by way of deed, tax depends on the physical location of the policy at the time of death. If the policy is not by way of deed, it depends on where payment of proceeds can be obtained.

These are only a few examples. There are many more and sometimes it may be difficult to determine location. Nothing should be taken for granted, and expert advice should be sought.

While some assets, for instance paintings, are easy to move offshore, care should be taken when deciding where to send them.

For example, British inheritance tax is levied on all assets located in Britain, regardless of where the deceased was domiciled.

It would be most unfortunate to move assets out of Hong Kong to Britain and then be charged 40 per cent there rather than 18 per cent here.

Cash deposits in banks are again rather complicated. The Hong Kong Revenue's view is that such property is, in essence, the right to repayment of a deposit.

If this right is enforceable in Hong Kong, then it is a Hong Kong asset.

Life insurance policies are another area where it is possible to make use of the offshore rules.

The basis of a life policy is that it is a contract that gives rise to a debt payable by the insurance company.

Provided the debt is situated outside Hong Kong, the policy proceeds will be safe from estate duties.

The ''location'' of a policy is said to be the place where it is payable.

In one case in 1982, the deceased had taken out a life insurance policy with a Canadian company but had applied for, signed and received the policy in Hong Kong.

He also paid all the premiums in Hong Kong dollars.

The insurance company operated in both Canada and Hong Kong but the policy specifically provided that all payments by the insurance company were to be ''payable by banker's demand draft in Toronto for Canadian dollars''.

Despite everything being done in Hong Kong, payment could only be obtained in Toronto and the policy was therefore free from the Hong Kong taxman.