UK Resident Receiving Inheritance From Abroad

If you have inherited money from overseas, you will need to check the tax position and whether there is a UK tax liability on the inheritance.

The tax rules on receiving inheritance money from abroad can quickly become complex. In this guide, we look at when liability to UK tax on inheritance from abroad arises, and the potential tax consequences for a UK resident receiving inheritance from abroad or from someone living abroad.

 

Rules for UK residents receiving inheritance from abroad

 

If you receive an inheritance from an estate including foreign assets, or where the deceased lived abroad, there may be UK tax consequences, not necessarily for you personally but for the deceased’s estate by way of inheritance tax. This is the tax payable in the UK on the net value of an estate, after all debts and expenses have been discharged, but before the estate is distributed amongst the beneficiaries in accordance with any will or under intestacy law.

The rules relating to a UK resident receiving inheritance from abroad mean that the amount of money you may be entitled to receive could be reduced. If you’re both a beneficiary and legally responsible for administering the deceased’s estate, either as an executor of their will or as their next of kin, this also means that you’ll need to consider the extent to which any liability to inheritance tax arises and, where applicable, ensure that the correct amount is paid.

When dealing with inheritance from abroad, this could give rise to a liability to pay inheritance tax either in the UK and/or in any country in which the deceased resided or where the asset is based.

In the UK, tax is payable to HMRC on a deceased’s estate if:

• the person who died was domiciled in the UK, and/or
• the person who died left you assets within the UK.

This means that if you are living in the UK when you inherit money or property from overseas, or someone living overseas, whether or not you will have to pay UK tax on inheritance from abroad will depend on where the deceased was domiciled and where their assets are located.

 

Was the deceased domiciled in the UK?

 

Being “domiciled” is a legal concept that describes the country in which a person has as their permanent home or that they have a substantial connection with. This means that even if a person lived outside the UK at the time of their death, they could still be UK domiciled. A person can, however, only have one domicile at any given time.

There are three distinct types of domicile recognised in the UK, including:

 

Domicile of origin

This is acquired at birth and, where the parents were married, the domicile is that of the child’s father, but if the parents were unmarried or the father had died before the child was born, it’s that of the child’s mother. The domicile of origin will then remain the same, unless and until a person acquires a new domicile.

 

Domicile of dependence

A minor under 16 years of age acquires the domicile of either their father or mother under the domicile of origin rules. This means that if the domicile of origin of the parent upon whom they are dependant changes before they turn 16, the child’s domicile also changes, where they will automatically acquire the same domicile.

 

Domicile of choice

This is where a person’s domicile of origin, or domicile of dependence, is displaced with a new domicile – one which the individual chooses for themselves. This relies partly on establishing residence in an alternative country, although much will also depend on demonstrating over time the intention to make this country their permanent home.

It’s not easy to displace a domicile of origin, since moving to a different country will not automatically change domicile status.

Much will depend on the strength of any links in the country of residence, and the extent to which an individual has severed any ties with their previous domicile. If the deceased was UK domiciled from birth, which is generally the case if the parent from whom they took their domicile of origin was domiciled in the UK, they will usually retain this status even where they move overseas, unless the person emigrates with the intention of cutting all ties with the UK and has settled permanently abroad.

 

Can the deceased be deemed domiciled in the UK?

 

In addition to the application of English common law when determining the domicile status of the deceased, there are also special “deemed domicile” rules for the purposes of inheritance tax that must be taken into account.

Even though, legally speaking, a person can only have one domicile, under these rules it’s possible for someone to remain domiciled elsewhere but still be “deemed domiciled” in the UK for inheritance tax purposes. This means that even if the deceased was born with a foreign domicile, and notwithstanding that it can be difficult to displace a domicile of origin, HMRC will treat them as being domiciled in the UK if either:

• they had lived in the UK for 15 of the last 20 years of their life
• they had a permanent home in the UK at any time in the last 3 years of their life.

These “deemed domicile” rules essentially mean that long-term UK residents, as well as those who have lived in the UK shortly prior to their death, may be treated as having acquired a UK domicile of choice when it comes to determining any liability to inheritance tax on their estate, even if they didn’t expressly intend to acquire a new domicile.

 

Tax consequences of the deceased being UK domiciled

 

For inheritance tax purposes, whether or not a deceased is domiciled in the UK may affect what tax their estate is liable to pay to HMRC. If a person is UK domiciled, regardless of where they are living at the time of their death, they will be subject to inheritance tax on their worldwide estate. This means that a liability to inheritance tax will arise in relation to an estate comprising foreign assets, even where the deceased lived abroad.

In contrast, if the deceased’s domicile was overseas, inheritance tax is only payable to HMRC on their UK assets, for example, property or bank accounts based in the UK.

However, it’s worth bearing in mind that if you inherit property abroad as a UK resident, even where no liability to UK inheritance tax arises on that property, you will still be liable to UK tax on any income or gains arising on foreign assets.

This means that if you inherit a holiday home and rent this property out, any rental income will be subject to UK income tax. If you then subsequently sell that property, you may also be liable to UK capital gains tax on any profit accrued between the date of transfer and the date of sale.

 

When is UK tax due on an inheritance from abroad?

 

If the deceased was UK domiciled or deemed UK domiciled at the time of their death, the extent to which any liability to UK inheritance tax will arise will depend on the value of their estate. The same applies to someone living abroad but leaving behind UK assets.

UK inheritance tax is payable at a rate of 40% on the value of the estate over the relevant tax-free thresholds.

Inheritance tax will normally be payable on all UK and foreign assets, or UK based assets where non-UK domiciled, that exceed the nil-rate band. The nil-rate band is the amount of an estate on which no inheritance tax is payable in the UK. For 2023-2024 the tax-free threshold is £325,000.

The residence nil-rate band may also be applicable. This means that where the deceased’s estate includes their main residence, and this has been bequeathed to a direct descendant, the estate will gain the benefit of an additional tax-free allowance of £175,000 before inheritance tax falls due. This could put the total potential nil-rate band for the deceased’s estate at £500,000.

The deceased’s estate comprises any money, property and possessions after payment of all funeral expenses, administration costs, debts and liabilities. Inheritance tax will then be assessed on the basis of the net value of the estate, having applied the applicable tax-free allowances, and in accordance with the inheritance tax rates at the time of death.

 

Claiming relief for inheritance tax paid overseas

 

Generally speaking, the tax rules of the country in which the deceased was domiciled will apply upon their death. This means that if the deceased owned assets abroad, but was domiciled in the UK, they will be liable to inheritance tax in the UK. Conversely, where the deceased was domiciled outside of the UK when they died, their estate will only be subject to UK inheritance tax on the value of their assets situated in the UK.

However, in some cases, depending on where the deceased was living or where the assets are located, there may also be inheritance tax, or its local equivalent, to pay in another country. That said, the UK has a number of bilateral double tax conventions for taxes on estates. This means that the executors or personal representatives of the estate may be able to claim tax relief through a double taxation treaty where the estate is liable to be taxed twice.

If there’s no double taxation agreement, relief may be available under HMRC’s unilateral relief provisions. This means that credit will still be given by HMRC for any tax paid abroad.

 

Can UK tax on inheritance from abroad be avoided?

 

Domicile is an important factor when deciding how a person’s estate will be dealt with in the event of their death, and is of particular importance if the deceased were to own property or financial assets in foreign jurisdictions. The management of a deceased’s estate will vary depending on each situation, but it’s important for the testator to have an understanding of how their tax liabilities work, whether they live abroad or have assets located abroad.

Avoiding, or reducing, liability to inheritance tax, is all about planning ahead. This means that during the course of their lifetime, the testator should consider the assets they own, including foreign assets, and the steps they can take to protect these from potential tax consequences. By seeking expert estate planning advice, a testator can minimise the amount of tax that their estate will be liable to pay, maximising the amount that they leave to their loved ones.

If you are the beneficiary of ‘unprotected’ foreign assets, especially if you’re also responsible for administering the deceased’s estate, expert advice should always be sought when receiving inheritance money from overseas. The tax rules are complex, although steps can still be taken to help manage your inheritance to ensure that any foreign estate is not brought within the scope of UK inheritance tax. This could be, for example, where cogent evidence can be presented to HMRC that the deceased was in fact non-UK domiciled.