DUBAI 18 July 2018: When it comes to buying into Dubai property, few nationals show more enthusiasm than the British.
New Dubai Land Department figures show that UK citizens have invested nearly Dh31.1 billion ($8.47bn) here in recent years.
One of the big attractions of living and investing here is the fact that it’s more or less tax-free. Or so it appears.
Unfortunately, for Britons living in Dubai and contemplating UK Inheritance Tax, it really isn’t that easy.
The long arm of the British taxman reaches even to the palm-fringed shores of Dubai, but there are ways of loosening his grip.
One of the most effective is creating a will, a short-term expense that can make huge long-term savings. But it needs to be the right kind of will, certain to be accepted by the courts.
40% Tax
If you own assets in the UK, whether a citizen or overseas investor, they fall within the scope of the country’s Inheritance Tax law. So when a person dies and their assets transfer to the next generation, 40% tax is payable.
The good news is that the law allows part of every estate to remain tax-free. Firstly, any assets left to a surviving spouse are tax-exempt. Secondly, the first £325,000 left to any other individual is known as the “nil rate band”, and is also tax-free.
Thirdly, a new exemption can also apply – the “residence nil rate band”. It is currently limited to an additional £125,000 and can be claimed where a residence is left to direct descendants. But it’s subject to more stringent conditions and will not apply in all circumstances.
After all that, you pay 40%.
Maximum Benefit
Understandably, families want the maximum benefit from the exemptions and this is where appropriately drafted wills are extremely valuable.
Two key factors affect the potential inheritance tax liability of Britons living here.
The first is a complex legal concept called “domicile”. Among other things, this decides whether or not you are within the scope of UK inheritance tax.
You may live in Dubai, but that doesn’t necessarily mean you have a legal domicile here. The “domicile of origin”, generally inherited from your father at birth, is extremely hard to lose.
To establish a domicile of choice in Dubai you must have made your home here and have the intention of remaining here permanently or indefinitely. This is difficult – though not impossible – in a jurisdiction not offering permanent residency or citizenship to foreign workers.
Domicile is Key
Domicile is so important because, if you have a UK domicile, inheritance tax covers all global assets, not just those in the UK. The bill will be calculated on everything you own worldwide, including any UAE property.
The second factor is the application of UAE law in the event of death. If there is no recognized and enforceable will in place, the default position is that fixed inheritance provisions based on Islamic sharia law govern the transfer of assets. An estate will be divided according to a pre-determined formula, with family members receiving a fixed share based on certain factors.
If that happens to British families living here, they could lose out in two ways. First, assets might not be apportioned according to the wishes of the person who has died. Second, the UK inheritance tax bill could be much bigger, as in the accompanying example.
Your Say
There are many reasons for foreign residents of Dubai to draft a will, not just Britons. Two of the best are ensuring your property is disposed of according to your own choices, and increasing tax efficiency, whatever your home country.
At present, the most secure will for non-Muslims in Dubai is that offered by the DIFC Wills Service, which has been proven to be acceptable to the courts in a number of recent probate cases.
This is a tolerant society, and the law allows non-Muslims to allocate their assets outside the UAE’s fixed share provisions .
But it needs to be clearly stated in a document which the courts find legally acceptable. For people who own assets in Dubai, a DIFC Will does just that.
Case Study: Story of Amanda and Frank
Amanda and Frank are both UK domiciled and live in Dubai with their two children, Daniel and Emma. Frank owns a villa in Arabian Ranches, plus cars and Dubai savings, to a total value of £1 million. He also has assets in England worth £1.5 million.
Frank has an English will, leaving everything to his wife. But he doesn’t have a DIFC Courts will.
He then dies unexpectedly. The English assets are easily dealt with. Amanda inherits them by Frank’s will and no tax is payable.
But in Dubai sharia rules apply and, as Frank’s parents are dead, Amanda inherits only one eighth of the estate, worth £125,000. Daniel receives double the share of his sister, Emma, in the remainder.
This outcome is unlikely to be what Frank wanted. But it also hugely increases the inheritance tax burden.
If Frank had drafted an appropriate DIFC will leaving all his estate, in England and Dubai, to his wife then the entire amount would have been tax exempt, because no tax applies if the money goes to a surviving spouse.
But now a large percentage of the estate will be taken by the taxman. Amanda’s £125,000 share of the Dubai estate is exempted, as a surviving spouse. So is the family’s allowance under the nil rate band, which is £325,000. The residence nil rate band is not available.
The remaining £550,000 will be taxed at 40%, producing a tax bill of £220,000. The family will probably have to sell assets to pay the bill, damaging their future wealth and security.
Note: The author is a Private Wealth partner in the Dubai office of Trowers & Hamlins. He is a registered wills draftsman for the DIFC Wills Service.