Inheritance tax double-taxation relief

Many of us will know that after the death of a loved one, paying inheritance is a crucial job to be dealt with when settling the deceased’s affairs.

If a deceased’s estate exceeds all tax-free allowances, inheritance tax may be due to HMRC.

If the deceased owned property abroad, inheritance tax (or a similar tax) may also be due to the relevant country’s equivalent tax authority. This makes administering the estate more complicated and on the face of it, results in having to pay double the tax on assets situated abroad.

Double-Taxation Conventions

The UK has entered into agreements with other countries which help prevent estates being burdened with multiple inheritance tax bills when assets are held abroad.

The UK has Double-Taxation Conventions with 10 countries: the Republic of Ireland, The Netherlands, South Africa, Sweden, the US, Switzerland, France, India, Italy, and Pakistan.

If a UK-domiciled person holds assets abroad in one of the above countries, then HMRC is entitled to tax the whole estate, and tax will not be payable to the other country where the assets are situated.

For example, if a UK-domiciled person owned a valuable painting in a holiday home in Italy, the inheritance tax on this painting could be accounted for and paid to HMRC along with the deceased’s UK assets, instead of arranging for payment to the Italian authorities.

What about real estate property?

There are some exceptions to the above, one of them being real estate property, for which both countries will raise a bill under their respective inheritance tax regimes.

Fortunately, the Double-Taxation Conventions provide that countries must give credit for tax paid in another country.

For example, if the deceased is UK-domiciled, but owned a holiday home in the US and their estate paid inheritance tax on this property, HMRC in the UK would have to acknowledge this payment and reduce the HMRC bill in account of this.

The end result is that the executors will have to spend time in arranging for inheritance tax to the foreign tax authority, but the estate will not actually have to pay the tax twice.

What if you own assets in a country that does not have a Double-Taxation Convention with the UK?

HMRC will give relief (Unilateral Relief) to estates that have paid inheritance tax abroad, despite the UK not having a formal agreement with the relevant country.

For example, Poland does not have a Double-Taxation Convention with the UK. In a scenario where a UK-domiciled person owned an apartment in Poland and this has given rise to a £5,000 inheritance tax bill in Poland, this payment will be acknowledged in the calculation of tax due in the UK to HMRC.

This article was prepared by Olivia Malek.