In a previous article, we drew attention to the need to review assets and the way in which they are held to avoid liability for UK inheritance tax. The key is at home, even more so after the decision of the British Government to tax the most basic of estate planning agreements. So what is home?
In Cyprus, as in the UK, everyone is born with an address. This is generally the address of the father and is known as the address of origin. Tea domicile of origin is withheld until a person demonstrates by his actions that he has broken ties with his domicile of origin and established a domicile elsewhere – a house of choice. Moving to Cyprus and making it your permanent home with the intention of staying can be such an event.
With regard to movable assets -bank accounts, stock portfolios and assets other than real estate- it is the law of the domicile that governs the ability to bequeath assets freely by reason of death. Many legal systems, including Cyprus, restrict this freedom so that most of an estate passes to the testator’s family. The part of the estate that can be freely disposed of is called disposable portion and it ranges from a quarter when there is a spouse and child, to the entire estate when there is no spouse, children or descendants of children, or father or mother.
Sounds complicated? Continue reading The surviving spouse is entitled to a part of the statutory part (the part of the inheritance that cannot be freely disposed of by will) and of the non-alienated part, if any. The size of the participation is determined according to whether there are children or descendants of children, or ascendants or descendants of ascendants. Some, for example, the descendants of sons, share their deceased father’s portion, others, such as the descendants of brothers and sisters, simply take equal shares. Anyone who received a gift from the living testator may need to take it into account. Where there is no spouse and only very distant relatives, the beneficiary may turn out to be the Republic of Cyprus.
As mentioned above, the domicile law covers only personal property. Real estate is transferred according to the law of the place where it is located. The will may or may not be valid in that country. The heirs of a testator who died domiciled in Cyprus, leaving a bank account in the Isle of Man and real estate in three other different countries may have to deal with five legal systems and pay three batches of inheritance taxes, before they can enjoy of his inheritance. They will remember it!
A possible solution
One answer to the problem is to avoid having to get involved with probate laws. Assets placed in trust outside of Cyprus will not be covered by the will and the terms of the trust can ensure that they eventually pass to the testator’s intended beneficiaries.. The laws of most major offshore financial centers also exclude claims arising from the forced heir laws of foreign countries.
Cyprus law contains a provision for British citizens who may freely dispose of their property by will. It may be a simple way out, but does it undermine the claim to a domicile in Cyprus? It certainly misses the opportunity to create a very attractive tax planning vehicle for heirs in the UK.