Inheritance Tax Series – Overseas Issues

A series of articles highlighting key areas that affect taxpayers and practitioners involved with inheritance tax and estates and identifying opportunities to mitigate inheritance tax.

Inheritance Tax – Overseas Issues

General Rules

Where a person is UK domiciled their estate will be subject to inheritance tax on their worldwide assets.

Therefore overseas assets such as foreign bank accounts, holiday homes etc. will be subject to inheritance tax in the UK.

Relief is given for foreign liabilities (for example an overseas mortgage) by deducting the amount of the liability from the value of non UK property.  Any excess can then be set off against UK property.

 Foreign Property – Deduction for Expenses

Where the estate includes overseas property, the personal representatives may incur additional expenses in connection with the disposal.

It is possible to claim a deduction for expenses of administering or selling overseas property up to a maximum of 5% of the value of all foreign property in the estate.

Thus, where the estate of a UK domiciled person includes a house in Spain worth £250,000, the personal representatives may claim a deduction for expenses of up to £12,500 (£250,000 x 5%), potentially saving inheritance tax of £5,000 (£12,500 x 40%).

Double Tax Relief

Where an estate is subject to inheritance tax in both the UK and another country on the same assets the estate may be subject to double tax.

The UK has double tax treaties for inheritance tax purposes with the Republic of Ireland, USA, South Africa, France, Netherlands, Sweden, Switzerland, Italy, India and Pakistan.

These double tax treaties set out the taxes that qualify for relief under the agreement, the taxing rights of each country in respect of different types of assets as well as the mechanism for double tax relief where inheritance tax is payable in both countries.

It is important that care is taken to review the appropriate double tax treaty carefully because the personal representatives will need to understand whether relief should be claimed in the UK or abroad.

Where inheritance tax is payable in the UK and a similar tax is payable in a country that does not have a double tax treaty with the UK, double tax credit relief should be available in relation to assets situated in the other country under the unilateral relief provisions.

For these purposes the location of the asset is determined in reference to UK law.

The amount of double tax relief under the unilateral provisions is limited to the lower of (i) the UK inheritance tax, or (ii) the foreign inheritance tax.

In cases where tax is payable in both the UK and another country in relation to an asset that is situated in a third country, or treated as situated in the UK under UK law and the other country under that country’s law, a proportion of the tax may be relieved in the UK.

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2 Responses to Inheritance Tax Series – Overseas Issues

  1. iT IS WORTH NOTING THAT THE DEEMED DOMICILE PROVISIONS IN THE uk ARE EXCLUDED BY THE TREATIES WITH fRANCE, INDIA AND PAKISTAN.

    • eavesandco says:

      Thank you for your comment Richard.

      The potential ability to override the deemed domicile rules is very useful for taxpayers that have been resident in the UK for a number of years but retained their non-domicile status.

      The UK-Italy inheritance tax treaty also contains a similar provision, although it is slightly more restrictive than the treaties with France, India and Pakistan and may not therefore be as useful in practice.

      Where tax treaties are being relied upon it is important that the treaty is reviewed carefully to ensure correct application of the rules.

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