MONEY MATTERS
An Expensive Business
The tax man traditionally wins on your death, but as Howard Bilton explains, there are ways of minimising his cut and maximising that of your heirs "After the abolition of estate duty in Hong Kong many people mistakenly believed that they no longer needed to consider estate duties, or inheritance taxes as they are called in some places. For most wealthy Hong Kong residents that isn’t true."
M
ost people prefer not to think about their own death, naturally enough, but failing to do so and to plan appropriately can be a very expensive business. Not for you, because you are dead. It’s your family who end up losing out. If you are poor, young, healthy, child-free and single you can stop reading now. If you have a spouse (whom you like) and/or some children then the following is important. After the abolition of estate duty in Hong Kong many people mistakenly believed that they no longer needed to consider estate duties, or inheritance taxes as they are called in some places. For most wealthy Hong Kong residents that isn’t true. Most will have investments outside the city and frequently those assets will be subject to “death taxes” in the country in which they are located. The older you get the more important it is to have your affairs in order, but unhappily people do die at unexpectedly young ages so it is never too early to start. If you know when you are going to die or your family own an electric rocking chair and know a good taxidermist you can leave planning until nearer your demise or altogether. Otherwise start now or as soon as you have assets of a value which will attract tax. Structuring your investments properly not only saves tax during your lifetime but will also save tax on death. What’s not to like? There is, supposedly, one way of finding out when you are going to leave this mortal coil. Check out www.deathclock.com and input some simple information about yourself. It will immediately tell you how long you have left. Amusing, maybe, but it would not be wise to rely on this. To illustrate what I am talking about let us consider the example of Joe Sixpack, a UK national who is a long-term resident of Hong Kong who has: 1. A nice London pad worth ₤2 million. 2. A collection of fine wines stored in London worth ₤150,000 3. A holiday home in Spain worth €3 million 4. A large portfolio of shares in US public companies valued at US$2.5 million 5. A property in Hong Kong in which he lives with his US national wife valued at HK$40 million. 24
HK Golfer・Feb/Mar 2011
The first thing to note is that as Sixpack is a UK national he might well be considered domiciled in Britain, despite his long-term residence in Hong Kong. If he is then his worldwide estate would be subject to UK inheritance tax at a rate of 40 per cent. Ordinarily transfers between husband and wife are exempt from UK inheritance tax but only if both transferee and transferor are UK domiciled. As Mrs Sixpack is American she will almost certainly not be domiciled in the UK, so the tax will bite. It is possible to establish an alternative “domicile of choice” outside the British Isles and thereby rid yourself of the liability to UK inheritance tax on your worldwide estate. But it’s extremely unwise to just assume that liability isn’t there. Even if Sixpack was not UK domiciled his UK assets would still be subject to UK inheritance tax due to their situs, so 40 per cent of the value of the property and the fine wine (after exemptions) will go to the UK tax man irrespective of his domicile. We believe the taxman is wealthy enough as it is but he does seem to be increasingly desperate for money these days. The portfolio of shares in the US would be subject to US inheritance tax. The property in Spain would be subject to Spanish inheritance tax and also “forced heirship” laws which mean Sixpack must leave a third of the property to his wife, a third divided equally amongst the children and the other third is considered free estate which he can do with as he pleases. That may not be as Sixpack wishes and is an additional consideration over and above the tax that would be payable in Spain. The Hong Kong property would not be subject to estate duty in Hong Kong because there isn’t any. His estate may be double taxed. Just because HKGOLFER.COM
death duties have been paid in the country of situs doesn’t necessarily mean that the tax isn't payable on the same asset elsewhere. Mrs Sixpack is likely to think rather less fondly of Mr Sixpack if he leaves all these problems to be sorted out by his executors, as not only will the tax have to be paid but it will probably take a minimum of two years to go through the probate process in all of the countries in question before the assets can be released to the executors. Only after that can the executors transfer the assets (or dispose of the assets and release the proceeds of sale) to Mrs Sixpack and the rest of the heirs named in the will. The good news is that to a certain extent it is true to say that estate taxes are voluntary. They are relatively easy to plan against. In simple terms the correct strategy is to transfer the various different assets to a company or companies appropriately selected for the jurisdiction in question and then place the shares of all those different companies into a foundation, guarantee holding company structure, trust or the like. By doing this you convert the different assets into the interest in the holding structure which can be carefully ordered to avoid any need for probate and, in many cases, any need to pay inheritance tax.
"The good news is that to a certain extent it is true to say that estate taxes are voluntary. They are relatively easy to plan against." Transferring the assets to the structures would normally represent a sale of each asset, so capital gains tax may be payable in its country of situs (not in Hong Kong because, again, we don’t have capital gains tax). The only good news to come out of the credit crunch is that values are likely to be historically low – so now is as good as time to do it as any. What is clear is that you either pay the CGT or your estate pays the death tax. One way or another they get you, but while you are alive you can take steps to minimise or eliminate both taxes. Why leave it to chance or to your nearest and dearest to sort out when they are most vulnerable and least equipped to deal with these matters? Howard Bilton is an UK Barrister, Professor of Thomas Jefferson school of Law in San Diego and Chairman of Sovereign Trust (Hong Kong) Ltd which specialises in international and offshore tax planning.
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HK Golfer・Feb/Mar 2011
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