Most people prefer not to think about their own death, naturally enough, but failing to do so and to plan appropriately can be very expensive. Not for you, because you are dead. It’s your family who end up losing out. If you are young, healthy and single you can stop reading now. If you have a spouse (whom you like) and/or some children then the following is important.

There is no estate duty in Malaysia, so many people mistakenly believe that they no longer need to consider estate duties, or inheritance taxes as they are called in some places. For most wealthy Malaysian residents that isn’t true. Most will have investments outside Malaysia and frequently those assets will be subject to “death taxes” in the country in which they are located. Obviously the older you get, the more important it is to have your affairs in order, but unhappily people do die at unexpectedly young ages so it is never too early to start planning. Unless you know when you are going to die so can leave planning until nearer that time, start now or as soon as you have assets of a value which may attract tax.

To illustrate what I am talking about let’s consider the example of our mythical client, “Joe Bloggs”, a UK national who is a long-term resident of Malaysia and has:

• A family home in London worth £700,000
• A holiday home in Spain worth €750,000
• A large portfolio of shares in US public companies valued US$ 500,000
• A property in Kuala Lumpur in which he lives with his US national wife valued at MYR 2 million

The first thing to note is that as Mr Bloggs is a UK national he might well be considered domiciled in the UK despite his long-term residence in Malaysia. If he is, then his worldwide estate would be subject to UK inheritance tax at a rate of 40% (the first £325,000 of value is exempt). Ordinary transfers between husband and wife are exempt from UK inheritance tax but only if both transferee and transferor are UK domiciled. As Mrs Bloggs is an US national she will almost certainly not be domiciled in the UK so the tax will apply.

It is possible to establish an alternative “domicile of choice” outside the UK and thereby rid yourself of the liability to UK inheritance tax on your worldwide estate, but it’s extremely unwise to just assume that liability isn’t there.

Even if Mrs Bloggs were not UK domiciled his UK assets would still be subject to UK inheritance tax at 40% due to their situs, so 40% of the value of the property is going to have to be paid over to the UK taxman irrespective of his domicile. We believe the taxman is wealthy enough as it is, but he does seem to be increasingly desperate for money these days. The portfolio of shares in the US would be subject to US inheritance tax.

The property in Spain would be subject to Spanish inheritance tax and also “forced heirship” laws, which mean Mr Bloggs is forced to leave one-third of the property to his spouse, one-third to be divided equally amongst the children and only the final third is the free estate, which he can do with as he pleases. That may not be as per his wishes and is an additional consideration over and above the tax that would be payable in Spain. The Kuala Lumpur property would not be subject to estate duty in Malaysia because there isn’t any.

If he is UK domiciled the whole estate would still be subject to UK inheritance tax at 40%. Also his estate may be double-taxed. Just because you have paid death duties in the country of the situs of the asset doesn’t necessarily mean that the UK won’t tax the estate again on the same asset. In this case that double jeopardy exists in relation to all assets other than the Kuala Lumpur property.

Mrs Bloggs is likely to think rather less fondly of Mr Bloggs if he leaves all these problems to be sorted out by his executors, as not only will the tax have to be paid but it will probably take a minimum of two years to go through the probate process in all of the countries in question and have the assets released to the executors. Only after that can the executors transfer the assets (or dispose of the assets and release the proceeds of sale) to Mrs Bloggs and the rest of the heirs named in the will.

The good news is that to a certain extent it is true to say that estate taxes are voluntary. They are a lot easier to plan against than most forms of tax. In simple terms, the correct strategy is to transfer the various different assets to a company or companies appropriately selected for the jurisdiction in question and then place the shares of all those different companies into a foundation, guarantee holding company structure, trust or the like. By doing this you convert the different assets into the interest in the holding structure which can be carefully structured to avoid any need for probate and, in many cases, any need to pay inheritance tax.

Transferring the assets to the structures would normally represent a sale of each asset so capital gains tax may be payable in its country of situs (not in Malaysia, because there is no capital gains tax). I suppose the only good news to come out of the credit crunch is that values are likely to be historically low, so now is as good a time to do it as any.

What is clear is that either you pay the CGT or your estate pays the death tax. One way or another they get you. While you are alive you can take steps to minimise or eliminate both taxes. Why leave it to chance or to your nearest and dearest to sort out when they are most vulnerable and least equipped to deal with these matters?

If Mr Bloggs is indeed still UK domiciled then he would still be taxed on the value of his interest in the holding entity, so it isn’t the perfect solution for him. But for most other nationalities it may well be no more complicated than the above. If Mr Bloggs is unsure about his domicile then he needs to establish certainty and work towards losing his UK domicile. Again, the sooner he starts that, the better.

One final consideration is that if you have a local spouse who is Muslim, Sharia law forced heirship will also apply.

This article appeared in the April 2011 issue of The Expat magazine

The UK’s two-tier taxation policy is costing the country’s poorest dearly – at least one million people are an average £450 a year worse off as a result of overpaid tax. Indeed those most vulnerable individuals – the lower paid and temporary workers often people working on Emergency Tax Codes before heading abroad – are losing out every year since the Revenue’s introduction of a policy that shifts the onus for claiming tax rebates onto the individual, a shift that many people are unaware of.

Since the inception of Self Assessment in the 1996/1997 financial year some nine million UK citizens – the majority of whom are higher rate tax payers with pensions, savings and property – have undertaken the annual process that places the burden on the individual to reveal relevant information and manage taxation. However, for the country’s 22 million people who are not Self Assessed a subtle shift towards personal responsibility has gone unannounced and unnoticed. Until 2001, the Inland Revenue contacted people it believed had overpaid tax during the previous year, including those that had benefited from a full year’s personal allowance as a result of job change, incorrect tax codes, maternity leave or entering full time further education.

Yet it has become apparent over the last three years that the Revenue has changed its policy: overpayment is not highlighted as a matter of course. If overpayment has occurred, the onus is upon the individual to make a claim to the Revenue. Given the British public’s notorious reluctance to contact the Revenue direct, and a fear that any rebate could be swallowed up by expensive tax advisor or accountant fees, the majority of this money is left unclaimed, adding an estimated £500 million to the government’s coffers annually.

How has this situation come about? It is not due to any deliberate policy shift from the Revenue, no matter what the majority of begrudging taxpayers would like to think, but is rather the result of dwindling resources in a time of increased pressures. Local offices, which used to send out reminder letters to people who were owed tax, now have to contend with the burgeoning pressure from government policies which make them deal with Child Tax Credit, Pensions Credit and National Insurance. In short they are swamped and have no time to hold individual people’s hands by sending out reminder letters. The onus has switched and it is very much down to the individual to claim back their own rebate – or risk it being forever swallowed up by The Government.

According to a source at the Inland Revenue, between 5 and 10 percent of the population is subject to an emergency tax code at the end of the year. This means that tax is paid throughout the year on the basis of a weekly proportion of the annual personal allowance. Therefore anyone failing to work the full 52 weeks is entitled to a tax rebate.

Those most at risk from this situation are primarily people with temporary or transient employment, such as people in the hotel/restaurant trade or merchant seamen. People going abroad and doing part-time work beforehand and students working prior to embarking upon a gap year will also be likely to overpay.

A further 5 to 10 percent will not have completed a full year’s employment as a result of moving abroad, being made redundant or having a baby and have therefore not claimed the full personal allowance entitlement simply because they were ‘not working’ on 5 April. Any individual whose working circumstances have changed, affecting allowances for healthcare and a company car are also likely to be overpaying tax if they have not immediately informed the Revenue.

So why are so many people failing to reclaim this tax overpayment? Firstly, many remember receiving letters from the Revenue in the past and mistakenly believe this system still operates. Secondly, it is widely perceived that employers handle the individual’s tax matters — unless under Self Assessment of course.

But times have changed and the era of personal responsibility is upon us. While those on Self Assessment are regularly reminded that failure to submit will result in a fine, the shift within the PAYE world has not been admitted, let alone publicised. The individual is now responsible for contacting the Inland Revenue to obtain their refund.

Yet, even if there is a belief that tax may be overpaid, few UK citizens are keen to approach the Inland Revenue, for fear that any approach could lead to a personal investigation. Even fewer would consider the costly business of employing an accountant or tax advisor to reclaim what may be a small sum.

Online services have taken up the mantle for the common man, meaning the individual does not have to employ an expensive accountant, making it possible to ascertain whether a tax rebate is due – not only for the last year but for the previous six years. Such services will calculate what is due and either reclaim the money or provide a letter instantly, for the taxpayer to send to the Revenue. Unfortunately, true to form, once the process is in place, the Revenue will take somewhat longer to respond and provide the rebate – often as much as five weeks!

In order to be able to claim their rebate taxpayers require their P45 or P60 provided by their last employer. With this information, the system can automatically calculate how much refund is due and either provide a prepared letter or the data can be sent to a tax advisor who will deal with the claim, often charging on a ‘no-win – no-fee’ basis. Throughout this process an individual does not have to contact the Revenue once – a key consideration for a tax fearing nation.

While such systems are invaluable in enabling people to reclaim overpaid tax, the shifting onus to the individual is a wider issue that simply must be addressed. If the government is to require even those on PAYE to undertake an annual taxation check why not move the entire population onto Self Assessment? This system is used in the US and other European countries. Those with little income are offered a simple, short form and only those with more complex issues – such as healthcare or pensions – are required to complete a more detailed form. Indeed, the Revenue has completed a trial of this short form – but only for those already on Self Assessment. It pays no account to those on PAYE unaware that they will not be reminded again this year to submit their refund application.

The system that is in place today is not working. Many needy UK citizens are regularly losing around £450 a year to The Government because the Revenue is ill-equipped to handle all that is being asked of it. At present millions of pounds are lying unclaimed in government coffers that the average person is either completely unaware or too scared to claim. Isn’t it time we started claiming back what is owed to us?

Anthony D’Alton, Tax Checker

Please note: This guide is intended to provide basic information only. Where specific advice is required, we recommend that you seek proper professional help; either from TaxChecker or other suitably qualified person or practice.

by Anthony D’Alton