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For clients who are domiciled within the UK, or who are domiciled elsewhere but own property within the UK, the Residence Nil Rate Band (RNRB) is of key importance. This is the largest and latest change to UK estate planning in recent years, and since its introduction on 6 April 2017 a key trend in UK estate planning has revolved around making use of this allowance.

The RNRB is an additional inheritance tax (IHT) allowance to the current nil rate band (NRB) which currently stands at £325,000. It was introduced in stages and only reached its full amount of £175,000 starting from 6 April 2021. Like the ordinary NRB it is transferable, thus allowing the surviving spouse to make use of the allowance on their own death if it was unused on first death. This means that a married couple or civil partners may potentially pass up to £1m IHT free.

The availability of the RNRB is dependent upon a number of conditions being met. The deceased must have possessed a qualifying residential interest, all or part of this interest must be left to their direct descendants or a spouse of their descendants (“closely inherited”) and their estate must not exceed the taper threshold to a point that the entire RNRB is taped away. This leaves a person with no children, stepchildren or adopted children unable to qualify for the relief. It is also unavailable to many high-net-worth individuals.

Tapering

The RNRB is lost if the deceased’s estate far exceeds the taper threshold. If the deceased’s net estate exceeds £2 million at death, RNRB will be tapered away at a rate of £1 for every £2 over this threshold.

The effect of this is that no RNRB is available for estates with a net value in excess of £2,350,000, or £2,700,000 at the date of death of a surviving spouse where 100% of the RNRB was available to transfer from the deceased spouse.

Tapering can act to reduce the amount of RNRB that is actually available to transfer on the death of the surviving spouse. This is the case even if the RNRB was not used on first death.

Qualifying for the RNRB

With the introduction of the RNRB, a number of new definitions were added to the UK IHT legislation, the Inheritance Tax Act 1984:

A “Qualifying residential interest” – An interest in a dwelling house which has been the person’s residence at some point during their period of ownership. (Section 8H Inheritance Tax Act 1984). This definition will include a property that has been purchased and used as a residence but at the time of death was rented out, but it does not include a property purchased as a buy to let.

“Closely inherited” – Inherited by will, intestacy, or survivorship by one or more of the person’s direct lineal descendants. (Sections 8J & K IHTA 1984). Also, where the interest is left on trust where the descendant is treated as owning the asset. This means a property left to a direct descendant via a bare trust, immediate post death interest, bereaved minor’s or bereaved young person’s trust qualifies for the relief.

“Direct lineal descendants” – Children, grandchildren, and remoter issue as well as their spouses or civil partners. Also includes stepchildren, adopted children, foster children, and children of which the person had guardianship while they were under 18.

If estate exceeded the taper threshold, then the unused RNRB that is available to transfer will be reduced. If the first to die’s estate exceeded £2,350,000 then there will be no RNRB to transfer.

The RNRB may only be applied to a single property. If a person has more than one qualifying residential interest that could qualify for the relief, then their personal representatives must nominate a property to apply the RNRB to.

The property itself does not need to be located in the UK. It is possible for the RNRB to be applied to a foreign property provided all of the above requirements are met. However, this will be affected by the deceased’s domicile. If a person is domiciled in the UK, their worldwide estate is subject to UK IHT and so the RNRB may be applied to a property that is located abroad. If a person has a non- domiciled status, then their property must be located in the UK for the RNRB to apply, as only their UK estate will be subject to UK IHT.

Modern Estate Planning Techniques

Since the introduction of the RNRB, there has been a decline in the number of clients utilising Flexible Life Interest Trust (FLIT) and Discretionary Wills to protect their interest in real property. This is due to the fact that these types of Trust fail to meet the requirement that the qualifying residential interest is closely inherited.

There are therefore two modern solutions to protect the property with a trust while also qualifying for the RNRB. The first is to separate the qualifying residential interest from the rest of the estate and deal with this separately by placing it into an immediate post death interest trust for the surviving spouse, with the children nominated to inherit it immediately on the spouse’s death. This allows the residue of the estate to fall into the FLIT or discretionary trust to allow protection for generations to come, while still qualifying for the RNRB.

The second is to still utilise the FLIT over the whole estate but limit the trustees’ discretionary powers in a way that means they cease on second death. This retains all of the flexibility of the FLIT over all assets while the surviving spouse is alive, and also over all assets except the property after their death.

Both approaches unfortunately come at the cost of less protection over the property, as any protection can’t be extended beyond second death. NRB discretionary Trusts have also seen a resurgence as a result of the RNRB. This type of Trust planning had largely declined for married couples since the ability to transfer NRB was introduced in 2007, but they are now seeing a new use to help avoid loss of the RNRB due to tapering.

This use of the NRB trust involves directing assets away from the surviving spouse so that on second death, their estate doesn’t exceed the taper threshold. If leaving assets on first death directly to the surviving spouse or to an immediate post death interest for them is likely to result in pushing their estate over the taper threshold, then there may be a benefit to directing assets to a NRB trust on first death instead. On second death, the assets in the NRB trust created on first death will be outside of the estate value for IHT and if the result is that the estate is kept below the taper threshold then the RNRB is not lost, provided of course all other requirements for the RNRB are met on second death and the property is being closely inherited at that point.

Siobhan Smith

Lead Tutor for The College of Will Writing

The Society of Will Writers, UK

The Prosperous Tax

The headline grabbing Prosperous Tax went down like a lead balloon on the stock market which saw billions of RM wiped off its value following the announcement. It is common knowledge there were business winners during the pandemic. Super-profits in the past have incurred excess profits tax and windfall taxes. This time round, it is the Prosperous Tax. The proposal is that for high-income companies other than SMEs to be taxed at 24% on the first RM100 million and thereafter at 33%. The Prosperous Tax is slated to be introduced for just one year, in 2022.

Foreign Source Income Received in Malaysia by Malaysian Residents

The Malaysian Income Tax Act 1967 charges to tax the income of any person accruing or deriving income from Malaysia or received in Malaysia from outside of Malaysia. In a move to encourage the remittance of foreign source income to provide inputs to the Malaysian economy, an exemption from taxation was granted. The exemption took effect from 2004 and since then, individuals and companies (apart from certain specialized businesses of banking, insurance or sea or air transportation) remitted foreign source income free of Malaysia tax. This will end on 1 January 2022.

From this date, income tax will be imposed on Malaysian residents with income derived from foreign sources and received by them in Malaysia. This change will potentially affect all Malaysian residents with a foreign source income producing activity unless they choose to leave the income offshore. Examples of foreign income producing activities taxable on remittance include employment income of employees commuting overseas, consultants working overseas on foreign contracts, rental income from foreign property, wealth management involving foreign investments, holding companies with foreign subsidiaries, treasury functions of international groups, special purpose vehicles for foreign joint ventures. The list goes on.

The change may be to bring Malaysia’s tax system in line with best practices at the international level. Yet it is notable that Hong Kong with its ‘pure’ territorial tax system, pure because it only taxes locally sourced income and has no concept of foreign source remitted income, has so far resisted making any change. Further, Singapore which has a similar foreign source income tax rules to Malaysia has enacted a range of significant and practical exemptions which include an exemption if the headline tax in the foreign location is 15% or more. Similarly, Singapore has not rushed to make any change.

But equally so, the Malaysian Government hopes the removal of the exemption will create a rich new source of tax revenues. But with the removal of the exemption, Malaysia’s tax system may venture back into an area of ‘fuzzy’ tax law involving taxpayer uncertainty over which is unacceptable under its Self-Assessment System.

Difficulties exist in distinguishing between capital and income. Should the settling of a debt incurred in Malaysia with foreign source income outside of Malaysia be deemed ‘received’ in Malaysia? Would there be an element of retrospectivity applying to foreign income accumulated prior to 1 January 2022 but received in Malaysia by a Malaysian resident after this date? Will dividends received in Malaysia by residents from an offshore activity of a Labuan Company be henceforth taxed?

And then there may be double taxation issues. Tax may have been paid on the foreign source income in the foreign location. Whilst it may be possible for tax relief under current tax rules to extinguish or reduce the Malaysian tax payable, the correct amount may be difficult to ascertain. For instance, take the example of separate sources of foreign income accumulated over years in various locations and the effort required, the documents involved and the costs to calculate the amount of foreign tax relief.

These examples involve areas of considerable tax controversy. Yet the list is not comprehensive. There will be other uncertainties and contentions. In addition, the cost of collecting tax on remitted foreign source income may prove expensive compared to the collection of tax from other sources of income.

It is a fine line between encouraging inputs to the economy via untaxed remitted foreign source income and generating new tax revenues by taxing it on remittance. To achieve the optimum position, Malaysians will at a minimum want to have tax certainty and need clarity on the ‘safe harbour’ transactions.

Perhaps also the final legislation should include targeted exemptions to allow certain foreign source income to be remitted tax free. Exempting foreign source income subject to tax at a headline rate of 15% or more in the location of source would make a good start. Failing which, the proposal may result in the flow of repatriated foreign source income being stemmed and net tax revenue after costs lower than expected.

Tax Identification Numbers

In another move to bring Malaysia’s tax system in line with international practices, Tax Identification Numbers (TIN) will be introduced in 2022 with the aim of broadening the tax base and to prevent leakages of taxation.

The TIN is a discrete set of characters or numbers issued automatically by a tax authority to both individual and non-individuals whether they have a tax file number or not. Because a TIN will be given to everyone and every entity, the TIN is designed to identify the TIN holders whenever a transaction is made enabling a check on compliance with their tax obligations.

The TIN is required to be given by both parties to a transaction and potentially enables the tax authority to monitor for tax evasion. One might imagine that a tax file number will be required to take out a life insurance policy, open a share trading account, invest in a unit trust or to purchase a motor vehicle. This information is then relayed to the tax authority to examine whether the transaction is reflected in an income tax return, or the expenditure or activity is consistent with the income declared by the taxpayer.

Even those who believe they are presently under the tax radar screen, the high possibility of being detected by the TIN system should weigh heavily on their minds and make them think more carefully about meeting their tax compliance obligations and paying their fair share of tax.

Tax Compliance Certificates

In a further move to discourage tax evasion and make sure the system is working fairly, a Tax Compliance Certificate (TCC) will be required as a pre-condition for tenderers to participate in government contracts. No details have been issued concerning the TCC, but it will be an official document as proof of being current with tax filings and payment of taxes.

The TCC will only be issued if the tenderer is listed as a taxpayer, is up to date with tax filings and whether income tax is paid as of a certain date. Internationally, such reviews also embrace custom duties, withholding taxes, indirect taxes, and sometimes immigration compliance. Quite possibly the TCC may be given on an annual basis.

To obtain the TCC, certain information and documents may need to be submitted. The TIN (mentioned earlier), the tax file number, proof of the tenderers address, and details of the business bank account are probabilities. In what might be an interesting development, the TCC process may even drill down to the ‘good standing’ of the owners of the business; and in the case of a company, its directors, before the tenderer can obtain the TCC.

Much of the above is speculative for discussion purposes but nevertheless based on historical and international experiences. Further developments are keenly anticipated.

Mike Grover

Former Head of Tax at International Accounting Firm

By Mr Lee Chiwi
Excerpt from PreceptsGroup Succession and Trusts in Wealth Management (4th edition) Book

There are many different reasons why your client may consider setting up a trust. The following are examples:

To make adequate provision for the client’s family in case of unforeseen circumstances.

Preservation of wealth within the family.

To prevent heirs who lack the financial maturity from squandering away their inheritance.

Protection and provision for infants, special needs or vulnerable persons.

To assist in tax planning. Setting up a trust may help to reduce tax liabilities.

To make a gift with conditions based on the client’s wishes or the beneficiary’s circumstances.

Guidelines could be drawn up on how the trustees should deal with the trust, and at what age and in what circumstances the intended beneficiaries could have full benefit from the trust.

Asset Protection where assets settled under a trust would under certain conditions be free from creditor attack or be under a liability used to pay off the debts of the settlor or beneficiary.

To mitigate estate duty, where it might be applicable in the jurisdiction concerned.

If the client feels that an outright lifetime gift is not appropriate, the trust is one way to achieve such purposes.

Avoidance of Forced Heirship rules. In this connection, to provide benefits to heirs who might otherwise not be able to benefit from the settlor’s estate at death because of restrictions on how his estate is to be disposed.

The objectives in setting up a trust can also roughly be summarized under six heads:

• Economic, Tax and Estate Duty Minimization

• Succession and Inheritance

• Wealth Preservation and Enhancement

• Maintenance and Provision for the family

• Asset Protection and Avoidance of Potential Adversity

• Philanthropic, Charitable and Esoteric purposes

By Mr Lee Chiwi
Excerpt from PreceptsGroup Succession and Trusts in Wealth Management (4th edition) Book

Some of the high-net-worth individuals (HNWI) may have the resources and need to set up what is termed as a “Family Office” to manage the substantial wealth and private matters of their family. The Family Office model is largely borrowed from the United States where the origins of the modern family office had likely emerged from. It is essentially a structure that engages in the management and succession of say a family’s diversified wealth like a corporation. Like other corporations, the Family Office employs permanent staff and professionals to undertake various functions relating to investments, asset management, legal affairs, trusteeship, risk management, and tax. Professionals that are engaged include asset managers and investment advisers, trustees, in-house counsel, tax advisers, and accountants. Family members may be appointed as board members alongside external persons with expertise that the family may lack among themselves.

A tenet of the Family Office is the objective of educating the family members, especially the younger members on the values, objectives, investments, and financials concerning wealth management and their grooming to take leadership positions in the future as part of the ongoing succession and generational planning for the family.

By Mr Lee Chiwi
Excerpt from PreceptsGroup Succession and Trusts in Wealth Management (4th edition) Book

A person’s domicile is basically the place where he intends to make his permanent or ultimate home and where he will return to, even if he may presently reside somewhere else. In the law of probate and administration, the domicile of a person determines the right of that person to make a will and how his estate is to be distributed. The domicile therefore also determines the country where the primary probate process is to be obtained in relation to the deceased’s estate and the rights of his personal representatives to administer his estate.

Some of the factors that determine a person’s domicile include:

• his nationality and place of residence;

• whether the person has bought or owns any property in the country;

• whether his family is with him;

• the length of time that he has been living in a particular country.

For some people who may have several ‘residences’ and other assets in different countries, his personal representatives may have to confirm and prove the most probable country of domicile. A person can possess only one domicile at any one time.

Case Study of Peter Rogers May v Pinder Lillian Gek Lian [2006] SGHC 39

In the proceedings, issues were raised as to whether the deceased had died domiciled in Singapore or in England. The executor had commenced probate proceedings in Singapore on the basis that for the last 30 years of the deceased’s life, Singapore had represented the focal point of his personal, social, financial and business activities. Documents, such as the deceased’s passports, his personal tax submissions and newspaper reports articulating his actual intentions all served to fortify the conclusion that the deceased was domiciled in Singapore prior to his death. He had also significantly assumed Singapore citizenship.

On the other hand, in an attempt by his widow to stay certain court proceedings, she contended that the deceased had always been domiciled in England, notwithstanding his close connection to Singapore. The deceased was born and educated in England and had at all material times an English passport in addition to his Singapore passport, stayed in London regularly, owned property in London, had married her in London and was even on the London electoral role. She also commenced proceedings in England for a declaration that the deceased had died domiciled in England. The Court ruled in favour of the executor’s application for a determination whether a notation should be endorsed on the grant of probate that the deceased died domiciled in Singapore.

The Court also held that: “A testator’s domicile was not determined by the place where a will was prepared or the identity of those involved in preparing the will. The place where a will was made and the law pursuant to which it was made did not establish or even begin to point towards the domicile of a testator. After all, even a declaration of domicile in a will was legally irrelevant as this issue would in the final analysis be determined by the court taking into account the entire matrix”.

Tri Djoko Santoso

AEPP®, CFP®

Founder, LN Consulting

Tri Djoko Santoso CFP®, AEPP® is the founder of a leading financial planning school in Indonesia. His school is a business partner of EPPL which administers the AEPP® training in Indonesia. He is a Precepts Estate and Succession Practitioner.

It is imperative for every family in Indonesia to understand the importance of planning the Perwalian. In most family situations, children’s lives and assets are affected when they lose one or both parents. How Perwalian regulation is applied in Indonesia should be considered for Indonesian families when they have assets not only in Indonesia but globally.

What is Perwalian?

Perwalian or guardianship serves 2 purposes. Firstly, for the supervision of minors (under 18 years old including children who are still in the womb) who are not under the control of the parents, and secondly, for the management of the children’s assets. Due to the minors’ incapacity in taking legal action, they may be vulnerable to the actions of their Perwalian.

The emergence of the Perwalian is caused by the termination of a marriage arising from death of one or both parents, the divorce of the parents or a court decision regarding the revocation of parental power which will have legal consequences for both the husband and wife, especially the interests of the neglected child.

Who Is Eligible for The Appointment of a Perwalian?

The Indonesian government has issued a revised regulation no. 29 of 2019 concerning the terms and procedures for appointing a Wali (guardian). This revision includes the arrangements for the appointment of a Wali, procedures for the appointment and termination of a Wali, guidance and supervision of child guardianship, as well as reporting and documentation. The aim is to protect the child’s rights and meet the basic needs of the child as well as managing the child’s assets.

To be appointed as a Wali, the parties in the following order are prioritized:

1. Children’s family (blood related family up to the third degree*) or

2. Paternal or maternal such as uncle or aunt or

3. Other people or

4. Legal entity, for example, technical implementing units of ministries/ agencies.

* Third degree is a common term used in Indonesia for Perwalian which means descendants up to three generations; for example, father and child are first degree, grandfather and grandchild are second degree.

They should meet some basic requirements to be appointed as a Wali such as being physically and mentally healthy; well behaved, economically stable, sharing the same religion as the child and have obtained a court order. The Perwalian will end when the child attains the age of 18 years.

What Are the Duties and Responsibilities of a Wali?

The duties and obligations of a Wali include taking care of the child’s assets and be responsible for any losses caused by poor management, the maintenance and education of the minor, representing the child in all civil actions, carrying out the recording and inventory of the child’s assets and be accountable for the discharge of duties as a Wali .

Balai Harta Peninggalan

Balai Harta Peninggalan (abbreviated as BHP) is the guardian supervisory board in Indonesia. BHP as the supervisory guardian board will provide legal consideration in terms of rights and BHP is a Unit Pelaksana Teknis (Technical Implementation Unit) under the Directorate of Civil Affairs, Ministry of Law and Human Rights of the Republic of Indonesia. In essence, the duties of BHP are: “representing and managing the interests of people (legal entities) who because of law or legal decisions cannot carry out their own interests based on applicable laws and regulations”.

Role of Trusts

Trust is a primary tool as part of financial planning for Indonesian families with offshore assets. Trusts can be considered as an alternative to the Wali to protect and preserve children’s assets in Singapore. A Trust can continue to function even when they are over 18 years old. It helps every parent to have the peace of mind to ensure that their children and assets in Singapore are safe for the longer term.

By Mr Lee Chiwi
Excerpt from PreceptsGroup Succession and Trusts in Wealth Management (4th edition) Book

A Battle of Wills and the Propounder Having the Burden of Proof to Show Mental Capacity

In Chee Mu Lin Muriel v Chee Ka Lin Caroline (Chee Ping Chian Alexander and another, interveners) [2010] SGCA 27A the fight in court was between two sisters over the contrasting Wills that were made by their late mother, Madam Goh. On 16 March 1989, Madam Goh had executed the 1989 Will appointing C, who was her favourite daughter, as the sole executrix of her estate and bequeathed to her almost the entire residuary estate. Madam Goh made the 1989 Will about a month after her husband (the father) was incapacitated by a stroke. Other than providing for his needs, the grandchildren’s education and giving $150,000 to one son, she left the rest of her estate to C. In 1995, Madam Goh also transferred a half-share in the Holland Road house to C and her husband at a ‘discounted’ price. At the time of Madam Goh’s death, she owned several properties, the main one being the Holland Road house worth about $13 million. C’s sister M however propounded a 1996 Will executed by Madam Goh which gave C an option to buy her half-share of the house. This Will stated that the sales proceeds, with the rest of her estate, was to be shared equally among C’s five siblings. The 1996 Will cut C out of the inheritance. M, from getting nothing under the 1989 will, was to get a one-fifth share of her mother’s assets. In arriving at its decision, the Court held that M, as the propounder of the 1996 Will, had the burden of showing that Mdm Goh had testamentary capacity at the material time and the medical evidence adduced by her was insufficient. To discharge that burden, M had to adduce other non-medical evidence to show what the medical evidence did not show. While M did adduce other contemporaneous evidence in the form of eyewitness testimonies of what had happened during the signing of the 1996 Will to try to show that Mdm Goh had testamentary capacity, this evidence was rejected.

When the Will Is Given to Non-Family Members and Not the Next of Kin

In Dec 2007, the English High Court upheld the will of Golda Bechal despite attempts by her family to challenge it. Her entire £10 million estate was left to her Chinese friends, Kim Sing Man and his wife Bee Lian Man who run the Lian restaurant in Witham, Essex. The couple had been friends with “Goldie” Bechal, who was 89 when she died, and her husband Simon for many years. Her five nephews and nieces who contested the Will claimed their aunt was suffering from serious dementia, “lacked testamentary capacity” and demanded access to her fortune. But the High Court judge upheld the wishes of the widow and ruled that they would inherit none of Ms Bechal’s huge fortune. Ms Bechal left nothing to her surviving relatives.

Ms Bechal died in January 2004, leaving a portfolio of commercial properties. The judge accepted the Mans’ evidence that Ms Bechal, sad and lonely after the death of her husband and of her son, Peter, at the age of 28, became almost part of their family. The judge ruled that Golda “Goldie” Bechal was in sound mind when she gave the bulk of her estate to the Chinese couple whom the widow considered to be closer to her than her family. The Mans, who often served Ms Bechal her favourite dish of pickled leeks and beansprouts, expressed delight on the steps of the Royal Courts of Justice that their friend’s wishes had been granted. Mrs Man said of Ms Bechal: “She was like a mother to us. We had a very special relationship. She described us as being like her children.”

The presiding judge dismissed a claim by Ms Bechal’s nephews and nieces that she did not have testamentary capacity when she made a pair of wills in May and August 1994.“It was not in any sense irrational to give the bulk of her estate to Mrs Man, whom she regarded as the daughter she never had, and to her husband,” he said. The court was told that Ms Bechal, who died in 2004, grew close to the Mans and went on holiday to Israel with Mrs Man in 1994. The judge said: “I am satisfied that by 1994 Ms Bechal did regard Mrs. Man with all the affection she would have given to a member of her own family.”