IHT for non-resident with non-dom wife

[HKDC]

I'd be grateful for advise on the likely IHT that might have to be paid if I die before my wife.
Firstly, I'm not clear if I'm likley to have acheived non-dom status (UK born citizen, now Hong Kong Permanent Resident where I have lived and worked for over 16 years no UK assets except a bank account with a few hundred pounds).
Our main marital asset is our recently purchased family home in Hong Kong worth about 1million pounds which is mortgaged under a joint tenancy (without specifing the share) where we both pay a share of the mortgage payments - I pay about 2/3.
My wife is Chinese nationality/ HK resident.
My previous planning involved using a life insurance policy to cover at least the outstanding amount on the mortgage. However, since this is a recent upgrade in our home (expanding family...) I now have concern that I have rather unwitingly burdened my wife with potentially a huge IHT should I die unexpectedly.
Thanks for your advice
David

[maths]

Assuming you are UK domiciled (determined under UK law) and your wife is non-UK domiciled (determined under UK law) then in the event of your death (assuming you have made no significant lifetime gifts) and everything left to the wife [£325,000 + £55,000] ie £380,000 will effectively be exempt from UK IHT and the balance will be taxed at 40% (currently).

If you are by now non-UK domiciled then no IHT would arise.

Given the facts, you may well have acquired a non-UK (ie HK) domicile of choice in which case all seems well.

[pqtaxation]

.... My wife is Chinese nationality/ HK resident.
.... I now have concern that I have rather unwittingly burdened my wife with potentially a huge IHT should I die unexpectedly. Thanks for your advice.

To expand on Maths' comments, specific advice can only follow on from a very detailed examination of your past, current and future planned circumstances as well as any UK/HK estate duty double taxation agreement (of which I have no knowledge nor do I of HK estate duty legislation). From a historical viewpoint, you don’t say whether you were born legitimately to a UK domiciled father, and so took on his domicile as your domicile of origin; whether you have only lived in HK in the last 16 years and frequency of visits to UK; when you reduced your ties to UK to one bank account with a nominal amount in it and for what reason(s) you have retained that account. As regards the future, do you plan to remain living in HK for the remainder of your life and have you done anything to demonstrate that - buying a funeral plan/plot seems to be a favourite such demonstration.

But from what you have written it seems more likely than not that you have established a domicile of choice in HK as far as HMRC in UK will be concerned. You have clearly severed virtually all historical ties to UK (possibly you could move that account offshore to Isle of Man and/or put it in joint names with right of survivorship) more than three years ago and all you can do to improve your claim to be non-domiciled in UK/domiciled in HK is to demonstrate your future ties to HK. On your death, if your assets, your will and the administration of your death estate are all located in HK then it will be hard for HMRC to prosecute any claim for you to be UK domiciled even in the unlikelihood if they had a case under UK legislation - but DTA should address that.

I’d suggest you find a member of STEP resident in HK who has knowledge of both UK and HK legislation to speak to about your detailed circumstances so to give you and your wife specific advice and peace of mind. Such a person can be found via STEP website at:

http://www.step.org/system_pages/call_to_action_navigation/search_for_a_step_member/member_search_results.aspx

[dedalus]

Hello,

If the couple have married pre 1974 doesn't the wife gain the husband's domicile?
If they have the same domicile doesn't the IHT threshold go up to 650k in the death of the second spouse?

thanks for the clarification

[pqtaxation]

... a) If the couple have married pre 1974 doesn't the wife gain the husband's domicile?
b) If they have the same domicile doesn't the IHT threshold go up to 650k in the death of the second spouse?

a) yes - Domicile and Matrimonial Proceedings Act 1973 if married before 1 Jan 1974
but I assumed OP does not appear to be old enough which is why it was not mentioned.
OP wishes to be non-UK domiciled so his and his wife’s estates are exempt not just spousal transfers between them.

b) it is only when surviving spouse is non UK domiciled that there is a restriction on spouse exemption to one NRB plus £55k. The NRB is the NRB curently at £325k; but where a spouse/civil partner dies and his NRB is not fully used the unused proportion of his NRB is transferable to estate of the survivor on latter’s death (currently without limit of time).

[HKDC]

Thanks for the advise so far, sounds like it will hinge on whether I'm non-dom.
I can see there is one potential skeleton in the closet that I should address, as many years a go an IFA suggeted I keep my NI Class 2 contibutions up to date (as it's only 10 pounds a month). My guess is for non-dom these need to be stopped.

pq taxation - you are quite right about my age, I was 4 years old in 1974.

Would it make a difference if the property is still under mortgage at the time of death and still has outstanding amount, ie say my life insurance only pays off 80% of it? As i mentioned earlier my wife contibutes 1/3 of the mortgage.

finally is ther a way of testing if I'm likely non-dom? from what i see it souds as if it can be quite subjective fro a 'UK leaver'
Thanks.

[tax_schmax]

If you settle your life assurance policy into trust and die whilst mortgaged, the mortgage would reduce the value of your estate by the proportion of the tenancy in common, and the life policy would be excluded from your estate at the same time.

For example, you and your wife own the property in equal shares, £500K each. You also owe half the mortgage, assume £300K each.

Your estate excluding all other assets, 500K property minus £300K debt = £200K. At the same time, your wife is a beneficiary to a life policy in trust. As the policy is in trust, it is excluded from the value of your estate. Your wife could take or borrow from the trust sufficient to repay the whole mortgage. This would provide her with an unencumbered house and allow her to carry a debt (to the trust rather then a bank) in her own estate, although I am not sure if this is useful in respect of HK IHT.

[pqtaxation]

Thanks for the advise so far

Advice it is not – see my first post.

sounds like it will hinge on whether I'm non-domY

You’re stating the obvious that you need to become non-dom if you want the whole of your estate in HK to be exempt from UK IHT.

I can see there is one potential skeleton in the closet that I should address, as many years a go an IFA suggested I keep my NI Class 2 contributions up to date (as it's only 10 pounds a month). My guess is for non-dom these need to be stopped.

There maybe a UK/HK social security treaty

Would it make a difference if the property is still under mortgage at the time of death and still has an outstanding amount, i.e. say my life insurance only pays off 80% of it? As I mentioned earlier my wife contributes 1/3 of the mortgage.

Of course it will make a difference to the value of your estate on your death and the finances of your wife. If house worth £1m and mortgage £600k, and your life insurance pays off £480k (80%) of mortgage, then after your death your wife has a house worth £1m and a mortgage of £120k. The specifics of how the house is owned, terms of insurance policy and to whom proceeds of insurance on your life are paid might affect taxation charges as tax-schmax indicates in his comments.

finally is there a way of testing if I'm likely non-dom? from what i see it sounds as if it can be quite subjective from a 'UK leaver'.

HMRC won’t give you a ruling.

After reading the nature of your questions I would suggest you do take suitable professional estate planning advice – you have plenty of choice from the STEP website referenced in my first post above