Part VI · Chapter 16 · Keep · lesson 6
What varies by country, and what to ask a professional
12 min
Builds on The drag that compounds against you
Part VI · Chapter 16 · Keep · lesson 6
12 min
Builds on The drag that compounds against you
This lesson will tell you almost nothing specific, on purpose.
Everything in this area is decided by where you live, where you lived before, where the asset is, what legal form it takes, how old you are, who you are married to, and what the rules were in the year the thing happened. There is no version of it that is true in two countries at once.
What does travel is the shape: which mechanisms exist nearly everywhere, which numbers differ, and which questions are worth paying somebody to answer.
Two lists, and keeping them apart is the whole skill.
Mechanisms travel. Something is usually taxed when it is earned. Something is usually taxed when a gain is realised rather than while it accrues. Most systems have sheltered accounts of some kind. Most have rules about where you are resident. Most treat transfers at death differently from transfers during life.
Numbers and definitions do not travel. Rates, thresholds, allowances, what counts as residence, what counts as a gain, what is exempt, and how often all of that changes.
Knowing a mechanism exists tells you what question to ask. Knowing a number from somewhere else tells you something false.
Deferral compounds. A charge paid in year thirty is smaller in present value than the same charge paid in year one, and the money that would have paid it kept working in the meantime. This is why sheltered accounts matter more over long horizons than the headline rate suggests, and it is the single largest generic effect in this area.
Realisation is often a timing choice. Where a charge attaches to selling rather than to holding, the decision about when to sell is partly a decision about when to pay. That gives a real option, and it also creates a trap: people hold on to a position they would otherwise exit, purely to defer a charge, and the position then falls by more than the charge would have been.
Rankings change after tax. Two arrangements with identical gross outcomes can be far apart net, and the ordering can invert. Any comparison made on gross numbers is a comparison of something nobody actually receives.
Predict
What happens to assets when somebody dies is governed almost entirely by local law and by documents, and the two interact in ways that are not intuitive.
The mechanisms that recur: some assets pass by the terms of a document, others pass by how they are legally held regardless of any document, and others pass by a default rule when no instruction exists. Most systems have a process that must happen before anything can be distributed, and that process takes time during which assets may be inaccessible.
That last point is the one worth internalising, because it is a liquidity problem rather than a legal one. A household can be entirely solvent and unable to reach anything for months, which is the forced-decision scenario from earlier in this track arriving at the worst possible moment.
The generic failure in this area is not paying too much. It is having no instructions.
With no instructions, a default rule applies — one written for the average case, which is nobody's case. The people involved discover what it says at the moment they are least able to deal with it, and any disagreement between them is settled expensively.
Writing instructions is cheap, local, and the single action in this lesson that almost certainly applies wherever you are.
The value of an hour with somebody who knows the local rules depends almost entirely on the questions you bring. These are the ones that generalise.
What am I taxed on, and at what event? Earning, receiving, realising, transferring, or holding. Knowing which event triggers a charge tells you what you control.
What sheltered arrangements exist here, what are the limits, and what are the conditions for getting money back out? The exit conditions matter as much as the entry ones and get discussed far less.
Which of my assets pass by document and which pass by how they are held? This determines whether writing a document actually changes anything for a given asset.
What happens if I do nothing? The default outcome is the baseline every other option should be measured against, and most people have never been told what it is.
What changes if I move, or if I already have assets somewhere else? Cross-border positions are where the largest errors happen, because two sets of rules both apply and neither was written with the other in mind.
What is likely to change, and how much notice would I get? Rules move. An arrangement that depends on a particular threshold staying where it is has a risk attached that nobody usually names.
Check
Optimising for the charge rather than the outcome. Arrangements built primarily to reduce a charge tend to be complex, illiquid and dependent on rules staying still. The charge is a fraction; the arrangement can consume the whole thing. The question is always what the after-tax outcome is, not how small the tax was.
Copying an arrangement from someone in a different situation. This is the most common error and it is committed by careful people, because the source is usually somebody trustworthy describing something that genuinely worked for them. The rules that made it work were theirs.