PRs and Estates with non-UK beneficiaries – Taxing issues
When administering an estate, the personal representative’s (PR’s) duty is to the estate and the beneficiaries, as a group, and not to any individual beneficiary.
In general, the way in which an estate (in the UK of a person domiciled in England & Wales) is to be administered will be fairly straightforward – set out either in the Will or under the laws of intestacy. Levels of complexity are usually due to the nature of the assets and/or the relationships between beneficiaries.
In estates where some of the beneficiaries are tax resident outside of the UK; nationals or citizens of another jurisdiction; or resident, non-domiciled within the UK, they will usually be subject to non-UK tax regimes.
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Different jurisdictions may treat inheritances differently to the UK, and to each other. By way of example, within the UK, s.62(4) Taxation of Chargeable Gains Act 1992 provides when assets are appropriated to a beneficiary they are “acquired” by that beneficiary for CGT purposes at the date of death value. In some other jurisdictions (e.g. the USA), the beneficiary is deemed to have acquired such assets for tax purposes at the same value as the deceased, with a “nil” acquisition value as a default if the deceased’s acquisition value cannot be satisfactorily evidenced.
However, where does this leave the executor (or administrator) dealing with an estate where one, or more, of the beneficiaries are subject to a non-UK tax regime?
As identified above, a PR’s duty is to the estate and the beneficiaries as a group, and not to any individual beneficiary. Accordingly, to administer an estate, taking into account the tax consequences of the inheritance for individual beneficiaries in their tax jurisdiction, is outside the scope of the PR’s duties. Having said that, if there is only one beneficiary, there will be a close approximation between the PR’s duty to the estate and any duty to that beneficiary. Even in that circumstance, though, the PR will have no duty to enable the beneficiary to manage the inheritance in such a way as to minimise the impact of tax in their own tax jurisdiction(s). (N.B. An incautious PR could inadvertently create such a duty for themselves by being over-helpful, so beware!)
The PR dealing with the estate of an England & Wales domiciliary has no obligation to know or understand the tax law of other jurisdictions as it might apply to the beneficiaries of the estate. They should administer the estate in accordance with the Laws of England & Wales even when such laws might conflict with the tax law of the beneficiary’s jurisdiction, which can often be the case. There may be double tax agreements (DTAs) between the jurisdictions, but it is not for the PR to need to understand these. If relevant, it is for the beneficiary to obtain the relevant tax advice on their position.
It is even beyond some international tax advisers to identify how a DTA will apply to a beneficiary’s personal situation in relation to an inheritance, without first reviewing the relevant DTA in detail. There are about 130 DTAs affecting the UK alone (HM Revenue & Customs: Digest of Double Taxation Treaties, April 2018), many of which may have similar, but not the same, provisions. To expect a PR to do more than understand that one might exist between relevant jurisdictions, let alone have an encyclopaedic knowledge of any of them is unreasonably optimistic. Having said that, it is not particularly unusual for beneficiaries to have such an expectation!
But where does that leave us?
When administering an estate under the law of England & Wales, the PR is bound by the terms of the Will, or the laws of intestacy. Each beneficiary is to receive the benefit to which they are entitled, nothing more nothing less (subject, of course, to the sufficiency of the estate). If, say, residue is given to 3 beneficiaries “in equal shares”, they are each entitled to a one-third share of the distributable estate. If, say, one of them lives outside of the UK and will be liable for some form of gift tax on receipt of the inheritance, the PR does not (and should not unless the Will specifically requires it) rebalance the distribution of the estate to ensure that after such tax liability the beneficiaries receive their “equal shares” net of any tax.
It may be that once the beneficiaries have seen details of the assets which comprise the estate, they will identify assets they might wish to receive, or that there are some they don’t want to receive. Such wishes will help inform the PR on how they might deal with the assets within the estate, but should not be given undue weight. Uncritical compliance with such wishes could, for example, result in a CGT liability falling onto the estate, resulting in the other beneficiaries complaining that the non-UK beneficiary has received undue benefit as a result of the PR complying with those wishes.
If, taking all factors into account, the PR considers it to be beneficial for the estate, and the beneficiaries overall, to comply with particular wishes from a non-UK tax resident beneficiary in order to help manage that beneficiary’s local tax issues, then that should enable the PR to defend themselves against any complaint.
A Legislative Quirk!
There is one particular aspect which enables any beneficiary to throw the distribution of an estate into confusion, and cause the estate to bear any CGT due on a particular beneficiary’s share of assets – s.41 Administration of Estates Act 1925 (AEA 1925).
s.41 AEA 1925 requires the PR to obtain consent to appropriate from the beneficiary to whom the appropriation is to be made. If the beneficiary refuses to consent, but instead requires their inheritance to be satisfied in cash, any disposal of assets to fund the distribution will be that of the PR and not the beneficiary’s.
If, in the above example, the executor proposes to distribute the investments within the estate as to a one-third share of each to each beneficiary – two give consent and the third refuses to give consent, the executor should still appropriate one-third each to the consenting beneficiaries, but liquidate the other one-third as executor and account to that beneficiary for their share of the estate. Any gains or losses on realising the one-third share will be those of the executor.
In such a situation, the investments being appropriated to the two beneficiaries will need to be re-valued for appropriation as at the date of appropriation (Re Charteris, 1917). If the appropriation can be made on the same day the sales of the other one-third share are made, the net sale proceeds will, hopefully, not differ greatly from the value used for appropriation, thus minimising the potential for criticism.
Of course, it could be more satisfactory, if it is possible, to appropriate all the investments to the two consenting beneficiaries, and make up the third beneficiary’s entitlement out of cash balances, etc. Whether this is possible may depend on the extent to which the investments have appreciated since death, although it will not avoid the need to revalue as at the date of appropriation.
Within the context of this article, s.41 AEA 1925 takes us off at a tangent, albeit an interesting one.
The main aspect to be mindful of is that a PR cannot be expected to know about non-UK tax matters and, much less, the detail of any DTA entered into by the UK Government. If a beneficiary wants the PR to take account of the terms of any DTA that affects them, the PR should treat this as only one factor informing the administration and distribution of the estate. If it is a factor the PR decides to take into account, they should obtain their own advice in the UK as to how this will affect the estate. They should also make it clear to the beneficiary in question that whilst the PR might be amenable to complying with the beneficiary’s request, they are not doing so in reliance upon the advice the beneficiary has received, but in reliance upon their duties to the beneficiaries as a whole.
A PR should be wary of seeking their own advice on how a beneficiary might be impacted by the different laws in the jurisdiction of their tax residence, even if to verify the correctness of what the beneficiary has told them. Will this be a general administration expense (as it will help inform the distribution of the estate), or is it a liability of the beneficiary’s “share” (and the beneficiary might object to it, having paid for their own advice).
The beneficiaries, and their advisers, may have differing views on who should be liable for such costs, and the answer might depend upon the particular circumstances, including the nature of relationships, involved.
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