Estate planning for expats can be easy, not taxing

With increasing numbers of people retiring abroad, Fiona Murphy looks at the risks and asks how advisers are tackling estate planning issues for expatriates

It's dull, dreary and the hours of sunlight are getting shorter. No wonder retirees are flocking to live in warmer climes. It sounds idyllic, but many take the plunge before reviewing the potential impact on their estate which could leave their families with a hefty inheritance tax (IHT) bill. So how can advisers ensure their clients' dreams of living abroad do not turn into a financial nightmare for them and their intended beneficiaries?

Many are unaware of the risks, or have misconceptions. People often confuse residency with domicile and so believe that once they have moved abroad, UK IHT will no longer apply to them. However, IHT liability is based on where a retiree is domiciled rather than on residency and domicile can be harder to shed. For Tim Thornton-Jones, partner at Berkeley Law, a common fallacy is: people "get rid of UK assets and don't think they have UK IHT problems, but they do. They retain UK domicile and will be taxed on world-wide assets".

So how can advisers combat such perceptions? Preparation is essential. Clients will be consumed by day-to-day practicalities such as establishing overseas bank accounts, yet estate planning has to be firmly on their agenda. They have to ensure their plans are in order, to mitigate financial losses for any beneficiaries.But what does ‘order' mean in the context of retiring abroad? Standard Life's head of international technical insight, Julie Hutchison, says there are two key considerations: "Wills and powers of attorney are something you need to revisit as a priority and you also have to do that in your destination country."

While wills may seem to be an obvious provision to make, why should people look to have a power of attorney in place before retiring abroad? For Hutchison, it is purely due to "logistics" and she recommends: "It may be more convenient for [a person] to delegate legal documents to a lawyer" in their new land. It is also worth checking whether any lasting powers of attorney rights implemented in the UK would be accepted abroad. Alongside questions of whether legal documents from the UK will still be relevant, many people's thoughts turn to what they are leaving behind.

When there's a will...
A common question is how to write a will for assets left behind in the UK? It is recommended to view your assets in isolation by locality, for those still domiciled in the UK. Thornton-Jones referred to a case study of a UK entrepreneur who, planning to sell a business; wished to retire in Monaco. Berkeley Law advised the client and his wife to "sign new wills, one dealing with their UK assets, another with their Monegasque assets, and a further one dealing with their French assets."

This is a sensible approach, but there is one hidden trap that people need to know. As Hutchison warns, people have to ensure a "good fit" between wills, as many contain a clause at the bottom, revoking all prior wills. If a client forgets to omit this, they could void one of the wills. So, people have to be made aware of small details that could have catastrophic consequences, but the larger picture too, needs to be addressed.

A shift abroad often means taking on a contrasting legal system, which stipulates how an estate is divided. A key example is inheritance laws in the United Arab Emirates (UAE). As Guardian Wealth Management's regional manager (UAE), Chris Ferguson explains, the region is governed by Sharia Law.

"If there is no will, assets will automatically pass to the oldest surviving male relative," he says.

This means a wife would only be entitled to an eighth of the estate. This could be completely out of step with what the benefactor intended, again reinforcing the case for planning ahead. Another issue is inheritance tax issues for foreign national spouses of UK expats, again due to domicile. Here, the spousal transfer is limited to £55,000 (compared with £350,000 for a UK spouse) with the rest of the estate subject to 40% IHT.

Even succession laws in neighboring European countries differ from our own. In France, there are Forced Heirship Rules, which override moveable assets being passed entirely to the surviving spouse, in favour of a higher proportion for offspring. For many families, it could be resolved based on consensus, but for those squabbling about entitlement, it could be the key to unbolt a person's last wishes. Advisers have to ensure their clients are educated regarding any local differences, so they can plan for these issues.

Alongside diverging laws, there are structural differences in legal counsel with Hutchison drawing attention to the fact people struggle with "knowing who to go to. In France, for example, they have a noteur and that's not the same as going to a law firm, it's a different function." With all of these challenges, practical advice is needed, and UK advisers can put the necessary steps in place. In Thornton Jones's case, the client was put in touch with "local tax lawyers in Monaco for specific advice on the forced heirship rules and for help in preparing their Wills in those jurisdictions." Planning and seeking good local advice seem to hold the key. But are there any other planning routes?

Financial advice
Financial advice now comes into play. Many expats do not put sufficient financial mechanisms in place to suit their new home, and this can prove tricky when passing wealth on. Berkeley Law advised their couple to "review with their IFA, their existing life assurance and pension arrangements in order to ensure that they still worked as efficiently as possible" abroad. But even, when people are abroad, they have to review their investments to ensure they are up-to-date.

Some expats continue to use UK financial instruments, which is futile. Guardian Wealth Management's European Director, Gavin Pluck has seen expats save in UK ISAs but: "Because they're not paying UK tax any more, there is no real benefit. It's being taxed like any other investment because they can't offset it against taxes they're paying in the UK." He adds expats have to find an "alternative" to ensure growth in the "most tax efficient environment." And also, people have to find the solution fitting their personal circumstances and the strength of investment choices available in their country.

Pensions can be a grey area, with instances of foreign taxation overriding the tax-free lump sum rules of the UK. But choosing a suitable, overseas strategy arrangement such as a QROPS or QNUPS can be advantageous not only for an expat's retirement income, but their estate planning strategy. On death, the invested funds can be transferred to beneficiaries in non-taxable ways: via a pension or a lump sum; or directly to the estate.

As Rex Cowley, principal of Newdawn consultancy and research, says the key advantage of a QROPS is flexibility as it is effectively a trust, you can "mitigate IHT and side-step probate and pass wealth onto whoever you want, in a manner you want it to." He believes, "every expat should consider a QROPS, particularly if they have UK pension assets." There are different product plans and pricing structures, to suit the wide spectrum of expats' finances, but he warns, "The free schemes may not offer the bells and whistles compared to schemes that you pay for."

So, we have identified who can use it. But how can they demonstrate their eligibility, in relation to the complex nature of domicile? You have to demonstrate an intention not to return to the UK, for Cowley the most obvious symbol is completing P85 documentation for the HMRC, regarding domicile issues, paired with living abroad permanently.

However, a QROPS is not for everyone, it depends on the client's domiciled status and the jurisdiction they are moving to. As AXA Wealth's head of technical sales, Andy Zanelli explains, for those who are still UK domiciled, he does not see the benefit of setting up an overseas scheme for IHT easing: "Why would I tie [a UK pension] up for five years with legislation, when they are free benefits anyway up to the age of 75?"

He recommends taking one view on your pension, and a second view on other assets regarding IHT mitigation, in the context of your wider strategy. In agreement Cowley said anyone still domiciled in the UK but utilising the QROPS, would effectively be using a SIPP and would see no advantages over any other UK resident claiming their pension.

As the recent Gaines-Cooper case has affirmed, issues around a client's ties with the UK continue to have an impact on the assessment of domicile. It is also easy to unravel any financial plans that have been put in place. Expats may come back to the UK following a change in circumstances, becoming UK domiciled again and subject to UK IHT, once more.

In light of this, AXA Wealth's head of pensions development, Mike Morrison has said when people are planning to put mechanisms in place before retiring abroad, it is crucial to query future potential risks with advisers. They "need to be very honest with their financial advisers and with themselves." Instead of leaping in, people should take a view on how long they intend to live abroad.

Alongside planning and consulting specialist tax advice per country, this approach is the crucial factor for an adviser to ensure their client's plans will be failsafe abroad or flexible enough to combat lifestyle changes, at retirement and beyond.