Inheritance Tax on Property Abroad

How do foreign assets effect inheritance tax?

Your overseas assets are added to everything you own to calculate UK Inheritance Tax (IHT). This tax is 40% on amounts over £650,000(couple). So, having assets abroad can make your total estate bigger and potentially lead to more IHT. The UK has deals with some countries to avoid you paying tax twice on the same assets. You need to declare all your assets, wherever they are.

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Domicile and Deemed Domicile for UK IHT

Domicile is a key concept for UK IHT. If you are UK domiciled, your worldwide assets are within the scope of IHT.

Additionally, the concept of deemed domicile was crucial for long-term UK residents. You were generally considered deemed domiciled in the UK for IHT purposes if you had been resident in the UK for at least 15 out of the past 20 tax years. Once deemed domiciled, your worldwide assets became liable for UK IHT.

Important Update (from April 6, 2025): The rules have changed. From April 6, 2025, the test for including non-UK assets in the scope of IHT has shifted from domicile to residence. An individual will be considered a “long-term resident” for IHT purposes if they have been resident in the UK for at least 10 out of the previous 20 tax years. Once this threshold is met, their worldwide assets will be subject to UK IHT.

Inheritance Tax on Property Located Abroad (UK Resident)

As a UK resident (and likely UK domiciled or having met the long-term residence test), any property you own outside the UK will be included in your estate for IHT purposes. The standard IHT rate is currently 40% on the value of your estate above the nil-rate band (currently £325,000).

This means that if you own a holiday home, an investment property, or any other real estate abroad, its value will be added to your other assets (in the UK and worldwide) to determine if your estate exceeds the IHT threshold.

Double Taxation and Relief

A significant concern for UK residents owning property abroad is the potential for double taxation. The country where your property is located may also impose its own inheritance or estate taxes upon your death.

To mitigate this, the UK has double taxation agreements (DTAs) with several countries regarding taxes on estates, gifts, and inheritances. These treaties aim to prevent you from being taxed twice on the same assets.

How Double Taxation Relief Works:

  • DTAs often specify which country has the primary right to tax certain types of assets.
  • They usually allow for a credit to be claimed against the IHT paid in the UK for any equivalent tax paid in the other country. This means that if you pay inheritance tax on your overseas property in that country, you can often offset this against your UK IHT liability on the same asset.

Countries with UK Inheritance Tax DTAs:

For a comprehensive list and details of the tax treaties the UK has with other countries, including those covering inheritance tax, please refer to the official UK government website on tax treaties: UK Government Tax Treaties. This page provides access to the full texts of the agreements, which outline the specific rules for double taxation relief with each country.

Unilateral Relief:

If the UK does not have a DTA with the country where your property is located, you may still be able to claim unilateral relief. This allows a credit against UK IHT for the foreign tax paid on assets situated in that foreign country. The credit is usually limited to the amount of UK IHT attributable to that asset.

Practical Steps for UK Residents with Property Abroad

  1. Determine Your Domicile and Residence Status: Understand your current domicile status and how the new residence-based rules from April 2025 affect you.
  2. Value Your Overseas Property: Obtain accurate valuations of your property abroad, as these will be needed for both UK IHT and any potential tax in the foreign country.
  3. Check for Double Taxation Agreements: Determine if the UK has an inheritance tax DTA with the country where your property is located by consulting the UK Government Tax Treaties page. Understand the provisions of the relevant treaty.
  4. Understand Foreign Tax Obligations: Be aware of the inheritance or estate tax laws in the country where your property is situated.
  5. Keep Records of Foreign Taxes Paid: If you pay inheritance tax abroad, keep detailed records as you will need these to claim double taxation relief in the UK.
  6. Report Overseas Assets to HMRC: When completing your UK IHT return, you must declare all your worldwide assets, including property abroad. Form IHT417 is specifically for foreign assets.
  7. Claim Double Taxation Relief: Ensure you claim any available double taxation relief on your UK IHT return. Form IHT400 includes sections for this.
  8. Seek Professional Advice: Given the complexities of international tax and estate planning, it is highly advisable to consult with a tax advisor or solicitor who specializes in this area. They can help you understand your obligations, plan effectively, and ensure you claim all available reliefs.

Conclusion

For UK residents, owning property abroad adds complexity to inheritance tax planning. While these assets are generally subject to UK IHT, the UK has measures in place, through double taxation agreements and unilateral relief, to prevent or mitigate double taxation. Understanding your domicile and residence status, the tax laws of the countries involved, and the available reliefs is crucial for effective estate planning. Consulting the official list of UK tax treaties and seeking professional advice are strongly recommended to navigate these intricate rules.

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FAQ

If I am a UK resident, will I pay UK Inheritance Tax on my property abroad?
Yes, generally, if you are a UK resident for Inheritance Tax purposes (including being UK domiciled or having met the long-term residence test), your worldwide assets, including property abroad, are subject to UK IHT.
How does the ’long-term resident’ rule (from April 2025) affect Inheritance Tax on overseas property for UK residents?
From April 6, 2025, if you have been resident in the UK for at least 10 out of the previous 20 tax years, you will be considered a long-term resident for IHT purposes, and your worldwide assets, including overseas property, will be subject to UK IHT.
Will I have to pay inheritance tax both in the UK and in the country where my property is located?
Potentially, yes. However, the UK has double taxation agreements with several countries to provide relief from being taxed twice on the same assets. If no agreement exists, unilateral relief may be available.
Where can I find a list of countries that have Inheritance Tax Double Taxation Agreements with the UK?
You can find a comprehensive list and details of these agreements on the official UK government website: UK Government Tax Treaties.
What is Unilateral Relief for Inheritance Tax?
If the UK does not have a DTA with the country where your property is located, you may be able to claim unilateral relief. This allows a credit against UK IHT for the inheritance or estate tax you have paid in the foreign country on assets located there.
Do I need to declare my overseas property to HMRC for Inheritance Tax purposes if I am a UK resident?
Yes, as a UK resident, you are required to declare all your worldwide assets, including any property you own outside the UK, to HMRC for Inheritance Tax purposes.
How do I claim double taxation relief on Inheritance Tax for property abroad?
You can claim double taxation relief when you complete your UK Inheritance Tax return (Form IHT400). You will need to provide details of the foreign tax paid and the relevant assets.
Is it still possible to avoid UK Inheritance Tax on overseas property if I remain a UK resident?
Generally, if you remain a UK resident (and meet the criteria for domicile or long-term residence), your overseas property will be subject to UK IHT. However, double taxation relief can help mitigate the overall tax burden if inheritance tax is also payable in the country where the property is located. Careful estate planning and understanding the available reliefs are essential.
What if the country where my property is located has no inheritance tax?
If the country where your property is located has no inheritance or estate tax, you will still be liable for UK Inheritance Tax on the value of that property if you are a UK resident (and meet the domicile or long-term residence criteria). There would be no foreign tax to claim relief against.
Why is it important to get a valuation of my overseas property for UK Inheritance Tax?
An accurate valuation of your overseas property is crucial because the value will be included in your estate for UK Inheritance Tax purposes. The amount of tax payable depends on the total value of your estate. Additionally, the foreign tax authority (if applicable) will also require a valuation for their tax purposes.