There are widespread misconceptions about how overseas assets are taken into account for UK inheritance tax which could land many UK families with large inheritance tax bills unless planning measures are taken.
However, many financial advisers report that their clients believe assets held overseas are not subject to UK inheritance tax. For people who are UK domiciled IHT applies to worldwide assets, including property, bank accounts and investments.
Moving overseas assets
In particular, many UK nationals who have moved abroad wrongly assume that their change in residence altered their tax liabilities. This move will not have altered their domicile basis on which IHT taxation is based.
Shifting domicile, as opposed to residence, requires cutting all financial ties with the UK and providing strong evidence of a permanent move. People with holiday homes or inherited bank accounts abroad are more likely to be caught unawares, rather than wealthier clients who usually take advice and many often consider using companies or trusts to minimise taxation.
Moving overseas property into companies is often quite an efficient way of managing estate succession. Shares in the company can be gifted while voting control can be retained until death.
Gifting through Trusts
Using a trust effectively removes an asset from an estate after seven years, provided that the individual survives longer than that period. Assets worth up to the £325,000 IHT threshold, including those held overseas, can be gifted without any tax charge through a trust. A 20 per cent tax is liable above this value.
However not all countries recognise trusts ( France in particular) and assets included in them can be deemed part of an estate, and therefore liable for local taxation.
Similarly, should inheritance tax reliefs that apply in the UK – such as business property relief or agricultural reliefs – not be recognised in the country where assets are held, local taxes would still be payable.
To prevent duplicated taxation by both UK and foreign authorities, HM Revenue & Customs has a number of bilateral treaties with countries including Ireland, Switzerland and the US. Where there is no agreement, HMRC may give credit for IHT paid locally on overseas assets.
There is no catch-all solution for mitigating IHT given that each country, even within the EU, has its own rules. “Your UK and overseas advisers need to work hand-in-hand.”
As always in this area experienced advice is essential.