Investing in an asset based in a different geographical location
to where an investor is resident or domiciled can sometimes have unintended consequences. To where an investor is resident or domiciled can sometimes have unintended consequences. This is because the location of that asset may itself create a tax liability in that location. The ‘situs’ of an asset refers to the location of property, chattels or investments for legal and tax purposes. Unfortunately, the situs of an asset is not always obvious.
This means that unexpected but costly situations can arise, for example, with wealth in the UK regarding Inheritance Tax for those neither resident nor domiciled there, and for wealth in the US for Estate Tax for those who aren’t US persons.
Non-UK domiciles, with UK situs assets
Inheritance tax is levied at death on UK situs assets at a rate of 40% above any reliefs and exemptions that are available. The nil rate band, currently £325,000 per person, is the most valuable relief for most and is available at the same rate for UK domiciles and non-UK domiciles. However, whereas UK domiciles are subject to IHT on their worldwide wealth, non-domiciles are subject to UK inheritance tax on just their UK wealth. This includes UK shares, sovereign and corporate debt, property, chattels and potentially bank accounts, whilst funds may be excluded.
Non-US persons, with US situs assets
Estate Tax at a federal level applies in the US, on a worldwide basis for US persons with a generous allowance of £12.06m, but just $60k for non-US persons on their US situs assets. Rates are variable according to the value owned in excess of the available allowance, from 18 to 40%.
Some Nonresidents with U.S. Assets Must File Estate Tax Returns | Internal Revenue Service (irs.gov)
Furthermore, many investors are surprised to find out that shares of UK and US companies held through nominees, are still considered situs in those countries, and not where the nominee is located.
Conclusion
Some investors may wish to own US or UK shares through vehicles other than a simple corporate nominee, if their holdings are in excess of £325k for the UK or $60k for the US, and if they are not protected by a double tax agreement. For example, where purchases are made through offshore insurance and redemption bonds, the policyholder’s rights are linked to the exact value of their chosen holdings, but for the purposes of UK inheritance tax or US estate tax, they are neither the legal nor beneficial owners, ensuring their estates held this way are not assessable upon death. This can be a complex area, where advice may prove highly valuable.
Author
David Denton
Technical Consultant & Chartered Financial PlannerDavid’s primary role is to collate, simplify, regularly update and share technical knowledge, in a user friendly and practical way, within the Quilter group and with the adviser community. This is to assist with maximising financial planning post-tax investment returns given the complexity and fast changing legislation impacting wealth management.
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