Cross border estates: some top tips

The movement of people across national borders is not a particularly new phenomenon. Furthermore, where an individual relocates from one country to another, even for a limited time, it is reasonable to assume that they will acquire assets in that new jurisdiction, and those assets may remain there, notwithstanding the individual’s decision to return to their home country.

For lawyers advising on succession to private wealth, situations like this call for a detailed analysis of, among other things, the client’s worldwide estate and domicile to ensure that appropriate succession and tax planning measures are put in place.

In the abstract all of this makes perfect sense. There are however certain challenges which can present themselves in the course of dealing with an executry for a Scottish domiciliary who has an international estate.

1. Distinguish between succession law and tax law

Where an estate does have a cross border dimension, it is not uncommon for there to be two (or more) wills in place, with each governing succession to the assets in its own jurisdiction. This may have been done for particular reasons, for example to allow for the ease of distribution of different aspects of an estate to different beneficiaries, or to deal with heritable property more effectively. 

In the context of executries, where there is a Scottish will dealing with the majority of the deceased’s estate, and another will dealing with specific foreign estate, it will be important for both wills to be considered side by side. This ensures that succession to the relevant assets is handled appropriately. The key point to note here is that the wills concern succession to the relevant assets. While it may be obvious, the basic (but worthy of underlining) point is that this is distinct from the tax treatment of the estate, something that should not be lost in the course of analysing an estate.

It is also important to check at an early juncture that the wills are formally valid and that there are no accidental revocations of the other wills. “I revoke all prior wills and testamentary writings” is generally not a good start where there are two or more wills in an international estate!

Scottish domiciliaries will be subject to UK inheritance tax (“IHT”) on their worldwide estate. It may be the case that questions are raised, perhaps by executors of a foreign will, as to why IHT applies to foreign estate when there is already a tax charge applicable on death in that foreign jurisdiction (more on this below). As will be well known to private client solicitors, the UK tax treatment of the estate will follow the deceased’s domicile.

2. Cash flow

In international estates where IHT is payable, there can be a challenge in accessing funds in good time to settle any tax that is due to HMRC in advance of the payment deadline. HMRC’s deadline for settlement of IHT is no later than six months from the end of the month in which the deceased died, after which interest will begin to accrue on the unpaid tax (and there have been some material increases in those interest rates in recent times). The issue is however that it may not always be possible to get access to funds in the time allowed. This is not a problem unique to estates with foreign assets, but the international dimension can make accessing funds to pay the tax more difficult.

It should be borne in mind that a lack of funds is unlikely to be deemed a “reasonable excuse” by HMRC in terms of late payment of IHT. It is important, therefore, that advisers in all jurisdictions consider this as early as possible and agree on a plan to settle tax and liabilities as early as possible. This will be further complicated if there are different executors and beneficiaries in the different jurisdictions.

3. Double taxation

As is not uncommon with international estates, both the UK and the foreign state may look to impose their own “death tax” on assets. While it is true that not every state in the world levies IHT on the value of an estate on death, there may still be taxes chargeable abroad by virtue of the same event, i.e. death. That is when the issue of double taxation needs to be considered.

The problem of double taxation is not a new one, and many states have entered into treaties to deal with it as and when it arises. It should be borne in mind that while the UK has several double tax treaties (“DTTs”) in place covering a number of taxes, it has relatively few in place for IHT (only six in total). There are, in addition to those treaties, specific treaties in place between the UK and France, Italy, India and Pakistan, but those relate to estate duty and their detail needs to be considered where double taxation is an issue. Advisers should also consider the merit in looking to take advantage of any DTT relief; the process of claiming relief will inevitably involve an investment of time and require relevant expertise. In cases where the amount of double tax suffered is modest, it may not always be a sensible use of (ultimately) estate funds to attempt to take advantage of the terms of a DTT.

In the absence of a DTT, the only course would be to look to take advantage of unilateral relief. In broad terms, unilateral relief is a mechanism whereby HMRC gives credit against IHT for tax charged by a foreign state on assets in that jurisdiction. As with DTTs, securing unilateral relief will take time and involve additional professional costs which many executors may not have anticipated.

4. Court process

Depending on the value and asset mix of the estate, there may be a need to apply for grant of confirmation in the Scottish courts. The obvious issue is that the Scottish courts cannot grant confirmation to foreign estate, which may create issues in terms of ingathering foreign assets. In that situation there may be a need to involve the courts in the jurisdiction where the foreign assets are located.

Historically, any logistical challenge in getting access to foreign estate tended to be overcome by simply having the Scottish grant “resealed”. Whether or not that is the most cost effective and efficient course will ultimately depend on the circumstances, and will need input from lawyers in the relevant jurisdiction. It may be preferable to simply seek to have the foreign court grant probate to the foreign asset. This is where it can be beneficial to have multiple wills, as this can allow for the court processes in the different jurisdictions to be progressed simultaneously.

As Scots lawyers, we will ultimately need to liaise with our counterparts on what the needs of their courts will be. It is however the duty of the executry solicitor to manage the expectations of their executor clients; the time taken to have an application for confirmation granted in Scotland can be significant, and that can be even more so where foreign courts are involved. This may also involve additional paperwork: there may be a need for an opinion to be given on the validity of a Scottish will, or there may be a need, as part of the foreign court’s process, to contact each beneficiary under a will to notify them of their entitlement before any grant of probate is issued. This will all take time and may not be met with much sympathy by executors who are anxious to wind up an estate while mourning the death of a loved one.

Manage expectations

The process of executry administration can often be deemed frustrating by executor clients or beneficiaries which is, of course, understandable. Much of the process relies heavily on third parties and generates a significant amount of paperwork. The same can be true of estates with foreign assets, which have the added dimension of potentially needing to involve foreign lawyers, notaries, tax advisers and their courts. As with much of the work in this sphere, it is advisable for lawyers to have a firm grasp of the many moving (often at the same time) parts of the executry with a view to being able to manage client expectations, and seamlessly navigate the various challenges which will undoubtedly arise.