Home is where the cash is
Succession planning for investors is so important, especially after expanding one's asset base by investing in property. All financial and legal advisors in the region suggest that their expatriate clients draft and validate a will. This is to assure that their assets are distributed as per their wishes. If they don't make a will, the law will say who gets what when they die.
Creating a will can also help to mitigate taxes if the instrument is planned and structured accordingly. This is especially important for UK citizens who are making several investments in the local property market, due to the steep inheritance taxes levied on their worldwide assets when they eventually die.
If an estate passes to the husband, wife of civil partner of the deceased and both spouses are domiciled in the UK there is no inheritance tax to pay.
Getting a professionally drafted will not only brings one peace of mind, but it may also significantly lower one's tax base. Many property investors do not know this.
After creating a will, investors should also periodically update it to reflect changes and any new investments they have made. An amendment to a will is called a codicil, and this must be signed and validated with the same formalities.
Anyone signing a will in the UAE needs to have it legalised by the Ministry of Foreign Affairs. Thereafter, the document has to be translated into Arabic and legalised by the UAE Ministry of Justice and then taken to the UAE Courts for confirmation. These steps are usually undertaken by a professional advisor, and it may also be helpful to have a professional conduct the entire process for you.
According to Mohammad D. Marria of Just Wills, the United Kingdom's largest will-writing company, "It is important for all UAE residents to keep a list of every asset, investment and bank account that they have made here. This is very helpful in case something happens to you."
"Admittedly, the process of validating one's will in the UAE is cumbersome and complex in the first place, and if someone wants to update their will again with new assets later, they will have to start the whole process all over again," says Marria.
Nevertheless, he stresses how important it is to do so.
If an expatriate residing in the UAE dies without having a will (called dying intestate), the family will have to go to a UAE court in order to get the entire estate disposed to the heirs. The judges will determine the heirs and their respective shares by referring to Islamic Sharia law, which is the law of the UAE for matters of inheritance and succession.
In order to have the estate processed, the heirs would be required to get a full family record from the relevant registrar in their home country. This document, which identifies the family descendents, must be legalised and attested by the UAE embassy in the home country. In the process, all direct descendents of the deceased must be notified by the heirs about the death, and this must be done by a registered process.
UK Inheritance Tax
In the UK, when someone dies his heirs are required to pay 40% of the value of the inherited estate, with the first US$592,700 (in the 2007-2008 tax year) exempt. This is what is referred to as the Nil Rate Band.
Many Britons living in the UAE would like to see the Nil Rate Band increased significantly. Some feel that inheritance tax is unfair, and that it amounts to a second line of taxation, since the person who died would already have paid tax on the income which was used to build up the value of the estate in the first place.
According to Mark Nierada, a solicitor and the head of private client services at James Berry & Associates Legal Consultants in Dubai, "The Nil Rate Band has been rising steadily but has failed to keep pace with property inflation. What started out as a tax on the wealthy now affects most property owners in the UK given the rise in property values."
The Labour government have confirmed the tax exempt slice will rise over the next two tax years to US$642,000 (probably estimated to be US$622,200 next tax year and US$642,000 the year after that).
Whereas this is welcome, it remains at best a limited relief for most tax payers and they need to exercise ingenuity to make the most of the available reliefs," says Nierada.
Not everyone pays inheritance tax on death. It only applies if the taxable value of one's assets worldwide at the time of death is above US$592,700, and is only payable on the excess above this threshold. Anything above US$592,700 is charged tax at the rate of 40%.
There are also a number of exemptions which allow tax payers to pass on amounts (during their lifetime or in their will) without any inheritance tax being due.
If an estate passes to the husband, wife or civil partner of the deceased and both spouses are domiciled in the UK there is no inheritance tax to pay even if it's above the US$592,700 threshold.
In addition, most gifts made more than seven years before one's death are exempt as well as certain other gifts, such as wedding gifts and gifts in anticipation of a civil partnership up to US$9,877 (depending on the relationship between the giver and the recipient).
Any gifts one makes to a charity are also exempt.
Tax payers can make small gifts, up to the value of US$494, to as many people as they would like to in any one tax year (6 April to the following 5 April) without being liable for inheritance tax. But one can't give a larger sum: US$988, for example, and claim exemption for the first US$494. Neither is it allowable to use this exemption with any other exemption when giving to the same person.
In other words, it is not possible for a tax payer to combine a 'small gifts exemption' with a 'wedding/civil partnership ceremony gift exemption' and give one of their children US$10,370 when they get married or form a civil partnership.
US$5,900 can be given away in each tax year without paying inheritance tax. One can carry forward all or any part of the US$5,900 exemption that isn't used to the next year but no further. This means one could give away up to US$11,850 in any one year if the exemption from the year before hadn't been used.
It is not possible to use an 'annual exemption' and a 'small gifts exemption' together to give someone US$6,420. But it is possible to use an 'annual exemption' with any other exemption, such as the 'wedding/civil partnership ceremony gift exemption'. So, if one child marries or forms a civil partnership one can give them US$9,877 under the wedding/civil partnership gift exemption and US$5,900 under the annual exemption - a total of US$15,800.
Inheritance tax planning
Married couples and civil partners in the UK who have not undertaken inheritance tax planning are reliant upon a default process, which comes into effect upon the first death of a spouse. On first death, the assets automatically pass to a surviving spouse free of tax.
However, this misses the opportunity to use the inheritance tax allowance of the deceased first spouse. On death of the remaining spouse, the combined estate can then only be reduced by the second spouse's single tax-free allowance (Nil-Rate Band).
This can leave children or other beneficiaries with a potentially large inheritance tax bill to deal with.
Discretionary Will Trusts
An 'Discretionary Will Trust is one way that couples can mitigate or even completely eradicate an inheritance UK inheritance tax liability by taking maximum advantage of the tax-free allowances available to both of them.
According to Mohammad Marria of Just Wills, "A Discretionary Will Trust is a sensible, straightforward and a cost-effective scheme that is fully compliant in the eyes of the Capital Taxes Office (CTO)."
"When we draft your wills for you, we insert specific provisions into them to establish a Discretionary Trust when the first death occurs."
For example, in order to make the Discretionary Will Trust provisions in the wills effective for an estate including real estate, the ownership of the house must be changed to/from 'Joint Tenants' to 'Tenants in Common'.
The Discretionary Will Trust is designed to accept assets up to the value of the personal tax-free allowance when the first spouse dies. Currently, this stands at US$592,700 for the tax year of 2007/8.
However, rather than needing to pass cash into the trust, and by doing so having to sell assets to realise the funds, the trustees are given powers to accept a Loan Note (an 'IOU') from the surviving spouse. This 'IOU' is held by the trustees until the death of the second spouse when it is called-in as a debt on the estate.
In effect this means that, rather than lose out on one of the valuable tax-free allowances, the couple have been able to ensure that both allowances are used.
"Discretionary Trusts work because the UK Finance Act gives a spouse the right to pass his or her entire estate to the surviving spouse inheritance tax free if that spouse is UK domiciled," said Mark Nierada, a solicitor and head of private client services at James Berry & Associates Legal Consultants in Dubai.
"We advise our UAE clients that there is a cap of US$701,000 if the surviving spouse is UK non-domiciled. This is a blessing and a curse - no inheritance tax on first death, but on the second spouse's death his or her estate pays 40% inheritance tax on non-exempt assets valued in excess of US$592,700."
"All this is not necessary if you want or can afford to make gifts of US$592,700 on first death. Not many can do this as the wealth may be tied up in the matrimonial home, or it is recognised that the needs of the surviving spouse must take precedence."
"That is why setting up a Discretionary Trust is so important, to utilise this additional allowance," says Nierada.
Under the provisions of the will, the surviving spouse has full use of original assets such as the house during the remainder of their lifetime. Upon second death, the loan to the trust is repaid from the estate of the surviving spouse which passes tax-free to the trust beneficiaries (usually the children and grandchildren). The Nil-Rate Band allowance of the second spouse is applied to the remainder, and thus both tax-free exemptions have been used.
Nierada concludes, "For most people with a potential inheritance tax liability the Discretionary Will Trust is an essential tax planning tool. It is comparatively cheap to establish and 100% effective. Everyone should have one - a no brainer."
Publish date: 03/05/08 15:11
Source: Arabianbusiness.com Martin Saldamando on Sunday, 03 June 2007