Overseas Assets and UK Inheritance Tax
There are many misconceptions about how to take overseas assets into account for UK Inheritance Tax. This could result in many UK families paying large Inheritance Tax bills unless careful planning measures are taken.
Moving overseas assets
Many financial advisers report that their customers believe assets held overseas are not subject to UK Inheritance Tax. Customers with holiday homes or inherited bank accounts overseas are more likely to be caught unaware as IHT applies to worldwide assets for people who are domiciled in the UK including property, bank accounts and investments.
Change of residency
Many UK nationals who have moved abroad mistakenly assume that their change of residency has altered their Inheritance Tax liabilities. This move won’t change their domicile on which IHT taxation is based.
Change of domicile
A person born outside the UK is deemed domiciled if they have lived in the UK for 15 of the last 20 years. This means they will then be liable to UK Inheritance Tax on their worldwide assets.
Moving your domicile, as opposed to your residency, means elimination of all financial ties with the UK and provides strong proof of a permanent move. However, you do not need to change your domicile to protect your assets.
Two ways to reduce Inheritance Tax on assets oversea without changing your domicile
1. Transfer assets held overseas through Trusts
This method is suitable for assets valued up to the £ 325,000 IHT cap, including those kept abroad. These assets can be donated through a trust without any immediate Inheritance Tax fee. Using a trust, after seven years, an asset is removed from an estate if the person who set up the trust is still living.
The reason, why this method is suitable for assets up to £ 325,000 IHT cap, is that if you gift assets over this amount into a Trust, a 20 percent of Inheritance Tax is still immediately payable.
It is also important to note that not all countries recognise trusts (particularly France & Spain) and the properties held in them can be considered part of an estate and thus be liable for local taxation. Likewise, in the country where properties are held, local taxes would still be payable should Inheritance Tax reliefs that occur in the UK, such as business property relief or agricultural reliefs, not be accepted.
2. Transfer assets into Family Investment Company
Transferring overseas property into Family Investment Companies is often a successful way to manage estate succession.
Setting up a Family Investment Company will allow you to place cash or assets into that company, and pass on your wealth free of Inheritance Tax (after 7 years) but retain control over the asset during your lifetime. Companies also offer a more effective tax environment for growth assets than holding them personally, especially rented property.
The company’s shares can be donated and ownership of voting can be maintained until death.
Dealing with HM Revenue & Customs
HM Revenue & Customs has a number of bilateral tax treaties with countries including Ireland, Switzerland and the US, to avoid duplicated taxes by both UK and international authorities. Where there is no agreement, HMRC can give credit for IHT on overseas assets payable locally.
There is no catch-all approach to minimise IHT as each country has its own laws, even within the EU.
The advisors in the UK and abroad need to work hand in hand.
As always experienced advice is important in this field. Please feel free to contact us if you require help in this area.