The definition of a 'situs asset' is investing in an asset-based in a different geographical location to where the investor is a resident or domicile. There are implications to consider for investors who are likely to have these situs assets across different jurisdictions.
One such implication is a potential liability to inheritance and estate taxes in the country where they are situated. An example of this is the UK inheritance tax (IHT). This is an estate tax assessable on assets located in the UK regardless of where the owner is resident. Such UK situs assets would be UK property and also listed shares on the London stock exchange (LSX)
IHT is generally (there are spousal and other factors exemptions) levied on death on the UK net assets at a rate of 40% above the value of the nil-rate band value of £325,000 (The nil rate band is the tax-free allowance which is the amount the estate is free from inheritance tax).
For UK domiciled investors, there will be UK IHT on their worldwide assets, not just the UK located ones.
How to solve this?
There are solutions to this potential tax liability. Financial planning may use a Trust or purchase the assets through a limited company (UK or Offshore); there are advantages and disadvantages to each solution.
An alternative solution to the former is to use a Private Placement Life Insurance policy (PPLI). We have previously discussed the structure of a PPLI policy and its benefits to the international investor. To solve the potential liability of inheritance tax on UK situs assets, a PPLI is a solution.
Transferring the UK shares into a PPLI by way of in-specie transfer to the PPLI is not a gift for UK inheritance tax purposes, and therefore there no IHT implications. There are generally no UK income tax or capital gains tax implications (not however UK property-rich funds) for a non-UK resident/domicile transferring the shares.
Once the assets are held within the PPLI, the previous owner is deemed to have relinquished all legal and beneficial rights to assets and therefore on death, and the value of the shares are no longer assessable to UK inheritance tax
Worldwide estate planning for cross-border investors is complicated and requires specifics advice to each country. There may be double taxation agreements to consider. Estate planning for tomorrow requires action today