The UK inheritance tax applies to the worldwide assets of persons who are domiciled in the UK, and to the UK assets of persons who are not UK domiciled. A person’s domicile is the jurisdiction where that person has the closest connection, which is often the country that a person ultimately regards as home. A person has a domicile of origin, which is the country regarded as home by the person’s father at the time of birth, but can acquire a domicile of choice, the country in which that person has chosen to settle and make their home.
The inheritance tax applies on certain lifetime transfers of value and on the estate of deceased persons. The lifetime rate of inheritance tax is 20% and the death rate is 40%, after allowing for a nil rate band of £325,000. The tax is paid either by the transferor (or personal representatives of a deceased person) or by the person receiving the transfer of value.
As a UK domiciled person may be liable to inheritance tax on assets situated abroad, it is not unusual for the jurisdiction where that property is located to also want to impose a similar type of tax, which could be an inheritance, gift or wealth tax. This may give rise to double taxation on the person who may be paying tax to two countries in respect of the same property.
Unilateral double tax relief
Unilateral double tax relief is available under UK law when property is subject to inheritance tax in the UK and is also subject to a similar tax in another country. The relief enables the taxpayer to deduct the tax paid overseas up to the amount of the UK inheritance tax liability. The computation of the double tax relief involves finding the average rate of UK inheritance tax paid and comparing this to the rate of foreign tax paid in relation to the property to establish the amount of relief available.
Unilateral double tax relief is also available where inheritance tax is imposed by the UK and another country on property that is located in a third country. In this case a credit amounting to a proportion of the tax is given as relief against some of the foreign tax. This credit is arrived at by dividing the UK inheritance tax paid by the total of the UK and foreign tax, and applying the resulting fraction to the lower of the UK or the foreign tax paid.
Double tax treaties
The UK has concluded a number of double tax treaties in connection with taxes on estates, gifts and inheritances. Bilateral treaties have been concluded with countries such as the USA, the Netherlands, Sweden, Switzerland, Ireland and South Africa. There are also some older double tax treaties with countries including France and India that were concluded some years ago when the UK had an estate duty rather than the current inheritance tax.
The treaties generally permit the country where the transferor is domiciled to have the right to impose a tax on the person’s property, wherever situated. The other contracting state would have the right to tax certain specific types of property located in its territory, for example immovable property.
In cases where there is still double taxation, the bilateral treaties lay down rules for how relief is given for double taxation, for example stipulating which country gives credit for the other country’s tax in these circumstances. If relief under the treaty is less generous than the unilateral relief given under UK tax law, the UK will give the unilateral relief to the taxpayer.
Inheritance tax planning
A person who is taking a decision to buy property abroad will often have more immediate problems to deal with than considering the implications for inheritance tax if the property is transferred to another person at a later date or if there is a potential liability to taxation on death. However the process of buying property abroad should include consideration of inheritance tax issues. It is worth looking into what type of gift or inheritance taxes might apply in the foreign country. It is also worthwhile to check if there is a double tax treaty between the foreign country and the UK relating to gift or inheritance tax and to look at its provisions.
HMRC website www.hmrc.gov.uk
“Taxwise II 2009/10” by R. Bennyworth, S. Jones and M. Waterworth, Lexis Nexis 2009