When Charles became engaged to Diana, you can almost imagine the shock had Diana not been an Englishwoman, but perceptions change and their son Harry is about to marry Meghan, from California. This sounds simple, but (even without the royal connection) legally it is anything but.
How can couples like Harry and Meghan protect themselves and ensure that their wishes are achievable? Planning, as with most things, is key and this series of articles hopes to address and highlight just some of the key areas international couples should consider.
Do all tax authorities think alike?
Unfortunately not. If you own assets abroad or have foreign connections you will quickly come to realise that each country taxes different people in different ways at differing rates, based on different rules. They also have different laws regarding how you can pass on assets on death. If you have connections with multiple countries, it can make for a complex recipe! For example, the UK will tax a UK resident person on their worldwide income and capital gains, but will tax a non-UK resident person only on their UK source income and increasingly on their UK gains. However, other countries charge tax based on habitual residence, on religious grounds or (in the case of the US) on the basis of citizenship – even if it’s an accident of birth.
When Meghan marries Harry, she will be both a US citizen and a UK resident. She will in theory need to submit annual tax returns on her global income and gains in both countries, but this could lead to her paying double the tax. For this reason, the UK has put in place “double taxation agreements” with more than 130 countries, one of the best networks in the world. These agreements set out which country can levy tax and advisors base their planning on them, taking best advantage of the relevant laws. Most of those agreements relate to “everyday” taxes such as income and capital gains taxes, but some agreements cover inheritance tax (IHT) too.
0 per cent tax band
In the UK everyone has a basic 0 per cent IHT band of £325,000. The comparable US threshold is much higher for US citizens at US$11.18m, although if you are not a US citizen the threshold is just US$60,000. This, along with other differing restrictions between the countries can lead to a complex set of planning considerations.
For a married English couple, there is an exemption from IHT on assets gifted to a spouse, no matter the value - so a surviving spouse can inherit the assets tax free, ensuring the family is provided for.
However, this changes if the surviving spouse is not “domiciled” in the UK – a tax law concept broadly meaning where a person belongs and which affects how the UK can charge IHT on a person’s death. Domicile is a difficult concept which can often be different to the tax jurisdiction(s) in which they are resident and changes over time – it can even be “deemed” in certain circumstances, so advice is vital.
If the deceased spouse was UK domiciled and the survivor is not, the spouse exemption is limited and IHT may be payable on both deaths. It is possible for the survivor to make an election to be treated as UK domiciled. Although this avoids IHT on first death, it means the UK is likely to be able to charge IHT on all of the survivor’s worldwide assets on their death. It is therefore not an election to be taken lightly and should only be made after taking advice.
Owning assets abroad means that taking advice in all relevant jurisdictions is key. For example, many legal systems apply “forced heirship” so that, on death, assets must pass in a prescribed way (regardless of what the Will says). This can cause particular issues where there are multiple owners or with second marriage situations.
In 2015 a law was introduced by the EU to enable a person to elect in their Will that the laws of the country of which they are a national to dictate their succession. This would allow Harry, in our example, to elect for English law to apply and avoid any local forced heirship laws. However, Brussels IV does not change the tax position or property ownership structures so we still need to consider these aspects – for example, if Harry bought a French holiday home, he would probably want to avoid this passing into a trust under his Will, as French law applies a wealth tax to assets in trust.
There are many other planning considerations for international couples and although any planning needs to balance the family priorities against the tax position, early advice is key to ensure you understand the potential impact on your personal tax position.
We would also recommend engaged couples consider entering a pre-nuptial agreement in case the worse should happen – you can find out more about this and the particular complexities of international divorces in our article here. International couples also need to take advice on the immigration implications of any move to the UK, which you can read about here.