By Matthew Green, Managing Partner, Greenwood Private Wealth Management Ltd.
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