Bit of a nasty shock – UK IHT

I got a bit of a nasty shock yesterday. I was talking to my advisors bout some of my other tax related matters and the conversation turned to inheritance tax – or IHT as they call it. Estate duty was abolished in Hong Kong many years ago so I assumed I had nothing to worry about. I’ve lived in Hong Kong 15 years and have permanent residency here. Plus, I already knew that any assets situated in the UK would be subject to UK IHT at 40%, so I’d planned against that too.

My London property used to be owned by an offshore company, which was the most straightforward way to avoid UK IHT. A company, unlike a person, doesn’t die, and my shares in the offshore company did not count as a UK-situated asset. Bingo. But then the UK changed its legislation. So I was then advised to transfer the ownership to a trust, which achieved a similar result. I’ll save that for a later date.

Apart from the contents of the house I don’t have much else of value in the UK so I assumed everything was sorted. What I hadn’t realised was that I could still be regarded as UK domiciled despite me not having lived there for many years. If that is the case, the whole of my worldwide estate could be subject to 40% IHT. Nasty.

Apparently the whole thing hinges upon whether I intend to remain in Hong Kong indefinitely or whether I expect to return to UK at sometime in the future. From time to time Mrs G and I have discussed that it might be nice to go back to the UK. Hong Kong is idyllic in many ways but we still miss the open countryside, cleaner air, great sporting events and music in the UK. I would like to say that I miss going to the theatre and other cultural events but the reality is that when I was living there I rarely went to them. We’re both more into seeing bands at the Brixton Academy!

I suppose neither of us has really given much thought as to what we might do in the long-term. We are enjoying life in Honkers and prefer to wait and see what happens. That was before this issue arose. The crux is that if I make a definite decision to stay in Hong Kong indefinitely then I can lose my UK domicile. If I don’t, then I remain UK domiciled and liable to IHT. But 40% of my worldwide estate is rather a big lump and I’m sure my family would be pleased if I planned against it and left the assets to them rather than Her Majesty’s Revenue and Customs.

If I planned to give it all away to charity the issue goes away because the charitable bequests would be exempt from IHT. Although I tell my children I won’t be leaving them anything, I do actually want to leave them a legacy even if I decide to tie it up into a trust so it can’t be squandered. I know I can plan against UK IHT, but it is complicated and could be expensive. If I am not UK-domiciled the planning would be much simpler. One way or another I need to be certain. As I was already thinking that the long, dark UK winters might not suit us, I have now definitively decided I will be staying in Hong Kong.

It was suggested, and I agree, that we should get legal opinion on the matter. If I can get a QC to rule that I am not domiciled then I can start planning in safety. If by any chance I were to change my mind later and end up back in the UK, HMRC might claim tax on any transfer or planning that I initiated while away so I need to be able to convince them that I was not domiciled when I the planning took place. A QC’s opinion is the best insurance I can get. It might be somewhat costly but it is a minor expense compared to getting this wrong and being faced with a potential 20% transfer charge.

Ultimately I would prefer everything to be held in trust. It protects the assets and means that I can get my estate tidied up while I am still around to oversee that process. After all I know where everything is. A lawyer friend of mine who specialises in obtaining probates and administering estates tells me that sorting out even a simple estate can take two years. He is working on one that is still ongoing after six years. Even for a lawyer that’s quite a gig.

I also know how long it took to receive small bequests from my grandparents’ estate and all their assets were in the UK. Mine are scattered all over the world. So at the same time as planning out the IHT, I will get everything sorted and tidied up in case anything happens. I know this will be a tedious process and that it will cost money to achieve the right plan, but I owe it to my family – and I’d rather not owe it to the taxman.