Succession of UK assets for Japanese nationals
Is a foreign will valid in the UK?
Yes. In accordance with provisions of the Wills Act 1963, a foreign will may be considered valid in England and Wales if it was prepared in accordance with the requirements of the national law of the country in which it was executed, or if it was prepared in accordance with the nationality or domicile country of the decedent, at the time of execution of the will or at the time of his death.
In principle, in order to uphold the will as valid, one must apply for an English Grant of Probate in respect of such a will. This article will later explain how to apply for a grant of probate.
Inheritance tax on UK assets
If you are a UK domicile and a Japanese national, you will have to pay inheritance tax on your worldwide assets.
If you are a non-UK domicile then you will pay inheritance tax on your UK assets only, however, foreign countries may also tax your estate.
To ensure that you pass on as much as your estate
Standard UK inheritance tax rate is 40%.
In England and Wales, there is no forced heirship, and people are free to leave their property to whomever they wish by making a last will and testament in the UK.
If a British resident dies without leaving a will, intestacy law determines how their estate is distributed and what UK inheritance tax is to be paid.
Intestacy rules in England and Wales
● If there is a surviving spouse/civil partner and children: The spouse/partner receives the first 270,00 – called the statutory legacy – of the estate and all their personal possessions, whatever their value. Half of the remainder also goes to the spouse or partner, with the rest split equally between any children. The share of any minor children is held in trust until they reach 18. If any children are deceased, their share goes to any grandchildren. The spouse or civil partner inherits even though the couple may have informally separated and had not legally divorced at the time of death.
● When there is a surviving spouse but no children: Here, the spouse/partner gets the first £270,000 and the remainder is split 50/50 between the spouse/partner and surviving parents. If there are no surviving parents, then the share goes to the siblings of the deceased (or nieces/nephews). Where there are none from these groups, the spouse/partner inherits the whole estate.
● If there is no surviving spouse/partner: The whole estate is distributed between the children or grandchildren. If there are no children or grandchildren, the estate passes to the following groups in descending order: parents, siblings (or nephews/nieces if deceased), half-siblings (or their children if deceased), grandparents, uncles/aunts (or cousins if deceased), half-brothers and half-sisters of parents (or their children if deceased).
Inheritance tax in the UK
In the UK, inheritance tax falls due to the estate of the deceased of the UK residents and on the UK property of someone who lived overseas. Such property may include (but is not limited to) real estate, cash, investments, and other possessions. UK Inheritance tax is payable on the net value of the estate, plus on any lifetime gifts made in the last seven years of the deceased’s life.
The estate administrators if there is no will or executors if there is a will, pay inheritance tax before it is handed down. Therefore, beneficiaries do not pay UK inheritance tax from their own pocket. They may, however, be responsible for other taxes such as income or capital gains tax, if they profit from selling assets that have succeeded to them.
Inheritance tax rates
The standard rate is 40% in the UK. For nationals and foreign residents, and non-residents with property in the UK, tax rates and exemptions are the same. In the UK, only around 4-5% of estates are large enough to incur inheritance tax.
This is due to the fact that there are several systems in place which can reduce inheritance tax or make an estate exempt from tax:
● There is normally no tax paid if the estate’s value is under £325,000. This tax free threshold applies to estates of all sizes, therefore the 40% tax rate only applies to the portion of the estate above this amount.
● In addition, pouses, charities and amateur sports clubs are exempt from inheritance tax.
● If a gift is given during the lifetime of the deceased, within a period of up to 7 years before death, it is exempt from UK inheritance tax.
● 50-100% tax relief is offered on some business assets.
● Tax rate on the estate can be reduced to 36% if at least 10% of the estate is left to charity.
● If the main home is left to children or grandchildren, the tax free threshold on this property will be up to £2 million.
Irrespective of the size and value of the estate, it will need to be reported to HMRC, the UK tax agency.
For non-residents, individuals need to use the inheritance tax form, IHT 401. If inheritance tax is not owed, such as if the value is under the £325,000 threshold, Form IHT 205 must be used.
UK Gift Tax
Gifts made during the last 7 years of life are subject to UK inheritance tax, although if the gift is made 3-7 years before death, they may be taxed at a reduced rate if it is worth more than £325,000.
These gifts can be any asset class, or when an asset loses value when it is transferred. For example, if an individual sells property to their children for less than the actual value, the difference in value counts as a gift.
UK inheritance tax is the full 40% within 3 years of death. Gifts that are made 4-7 years from a person’s death incur gift tax. Rates are outlined below:
● Less than 3 years: 40%
● 3-4 years: 32%
● 4-5 years: 24%
● 5-6 years: 16%
● 6-7 years: 8%
● More than 7 years: 0%
Japan has no double taxation agreement with the UK. If a transfer is liable to inheritance tax and also to a similar tax imposed by another country with which the UK does not have an agreement, you may be able to get relief under Unilateral Relief provisions, in relation to assets outside of the UK.
HMRC gives credit against Inheritance Tax for the tax charged by another country on assets cited in that country.
The general position under international law is that real estate and other movable assets are subject to the inheritance tax regime of the country in which they are located at the death of the owner.
Paying UK gift and inheritance tax
HMRC’s rules are that inheritance tax must be paid by the executors within 6 months of the person’s death. After this deadline, HMRC will charge interest.
In order to pay an inheritance tax bill, a payment reference number is needed. Then, you will be able to pay from your own bank account or from a joint bank account you held with the deceased.
Valuing an estate in the UK: Probate
When a UK resident dies, heirs must apply for the legal right to deal with their estate. This process is called applying for probate. If the decedent has left a will, there is a grant of probate. Without a will, the heir will receive letters of administration. In most cases, you can apply online. A number of documents will be required to be provided, such as the will itself and any codicils, certificates of birth, death and marriage or partnership as applicable.
Conditions when you may not need probate:
● If the person who died had jointly owned land, property, shares or money – these will automatically pass to the surviving owners.
● If the person only had savings or premium bonds
It is important to contact each asset holder, such as a bank or mortgage company, to find out if you will need probate to gain access to the assets. Every organisation may have different rules.
You will be asked to estimate the estate’s value when applying for probate. There are two aspects to this:
1. Contact banks, utility providers and other institutions where the deceased had accounts and ask for an official statement of their assets.
2. It is also important to value other possessions that the decedent had before they died, such as their home, jewelry, care, and any outstanding payments due to them. Liabilities must also be calculated. This will allow you to then calculate what UK inheritance tax applies to the estate.
Although it is not necessary to hire an accountant to value the estate (you can submit these figures directly to HMRC), it is recommended to hire a professional if there are various assets involved, particularly if some were overseas. Therefore, decedents who were Japanese nationals living in Japan or Japanese nationals also resident in the UK must obtain a professional valuation to ensure a smooth probate application.
Valuation of the estate can take between 6-9 months, or even longer for large estates. Accordingly, Japanese nationals living abroad or in the UK with assets in the UK may want to put their affairs in order at the time of writing a will so that a smooth succession of assets to the heirs can be ensured.
Kuribayashi Sogo Law Office specialises in cross border matters, and we can provide comprehensive legal advice to individuals dealing with inheritance matters. Please contact our office for more information.