When someone dies owning assets located in the United Kingdom, a set of probate rules and an inheritance tax regime will apply which can be quite different from those in the United States.
With very few exceptions-the main being small cash sums at banks, personal possessions and joint property passing by survivorship-it will always be necessary to obtain a U.K. grant of representation in order to deal with assets in England and Wales (Scotland and Northern Ireland have different rules). This is so regardless of the value or composition of the U.K. estate.
For example, consider Arthur McDonald, a fictional U.S. citizen who died in March owning £15,000 in a bank account in England, plus 200 Barclays Bank shares. His representatives must obtain a grant of representation even if he never lived in or visited England. His U.K. assets will be frozen until a grant has been taken out and it will not be possible to sell the shares without it.
Who is entitled to take out the grant will depend on the decedent's domocile and whether he had a will or died intestate. Even if a U.S. will can be proved in the U.K., which it normally can, other complications may arise. The most common problem is when the will names a U.S. trust corporation as sole executor. Only a U.K. trust company, or any individual, is able to take out the U.K. grant. In this case, the U.K. probate court would have to be satisfied that the U.S. trust corporation's governing document gave it specific authority to appoint a nominee or attorney to take out a grant on its behalf, in which case a U.K. attorney could be appointed to do so.
U.K. Inheritance Tax Filing Issues
Now that we know that Arthur's estate must obtain a U.K. grant, how do his representatives obtain one? This is where the biggest practical concern arises: U.K. inheritance tax reporting and payment has to occur before a grant will be issued.
Detailed information about Arthur's assets and liabilities, both in the U.K. and worldwide, and his domicile must be obtained to ascertain the decedent's inheritance tax liability.
The extent of an individual's exposure to U.K. inheritance tax depends entirely on his domicile status. A U.K. domiciled person will be taxed on all assets wherever they are situated. A non-U.K. domiciled person will be taxed only on assets located in the U.K. Domicile is the country or state that a person considers to be his real or permanent home-whether or not he actual lived there at the time of death. This is largely a facts and circumstances test and generally considers the same factors as used to determine domicile for both federal and state purposes in the U.S.
There are, however, traps for the unwary.
"Deemed domiciled" is a U.K. concept U.S. lawyers need to understand. An individual resident in the U.K. in any 17 of the 20 U.K. tax years prior to death-known as the "17 out of 20 rule"-will be "deemed domiciled" in the U.K. at death, but only for inheritance tax purposes. For example, if Arthur had been an income tax resident in the U.K. for 17 years, when he returned permanently to the U.S. on his retirement in March 2008 he would be treated as domiciled in the U.K. on his death in March 2009 and his worldwide assets would be subject to inheritance tax.
Similarly, an individual will continue to be treated as domiciled in the U.K. for up to three calendar years after losing a general law domicile in the U.K. For example, when Arthur left the U.K. on retirement in March 2008, his wife, Juliet, who had a U.K. domicile of origin-she acquired it at birth-went with him. Accordingly, Juliet's worldwide estate would remain within the U.K. inheritance tax net for up to three years from March 2008, when she acquired a new domicile of choice in the U.S.