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Inheritance Tax and estate planning for overseas buyers of UK residential property

Inheritance Tax and estate planning. UK real estate is always popular with overseas buyers, and investment continues to be made despite tax reforms over recent years. Before finalising a purchase, consideration needs to be given as to how the property will be owned to ensure it is as tax efficient as possible in respect of potential future Inheritance Tax liabilities.

Inheritance Tax

Inheritance Tax is payable after someone’s death at a rate of 40% on property and other assets owned in the UK and valued at over £325,000. The tax is payable on the part of the estate above this threshold.

In past years, overseas owners have formed non-UK registered companies to own UK property, meaning UK Inheritance Tax was not payable in respect of the property. However, the rules changed in 2017 and currently, Inheritance Tax is payable on the value of shares in such a company, making this a less popular option.

Some countries, including France, Italy, Switzerland, Sweden, the US and India, have entered into double tax treaties with the UK. This means that where the equivalent of an estate tax is payable in that country, it may be possible to avoid paying Inheritance Tax in the UK. 

Buying property with a commercial mortgage

The adjustments to the tax regime made over recent years have substantially reduced the ways to minimise Inheritance Tax. It is often the case that the only possibility is to take out a commercial mortgage to purchase the property so that this can be deducted from the value of the property when the time comes. One of the main issues with this option is finding a lender willing to lend against overseas income or business assets.

Insuring against Inheritance Tax liability

Life insurance is available to cover Inheritance Tax. It is important to ensure that the benefit of the policy will be received by a trust and not paid directly to the deceased’s estate, or it could itself incur an Inheritance Tax liability.

Putting a UK Will in place

Where UK assets are held, it is important to ensure that a UK Will is made. For married couples, it may be possible to take advantage of the exemption that allows an individual to inherit their spouse or civil partner’s entire estate without any Inheritance Tax being payable.

On the death of the second person, the unused Inheritance Tax nil rate band of £325,000 of the first to die can be transferred, giving a total allowance of £650,000.

While an overseas Will could be used to deal with property held in the UK, it will make administration quicker and easier where a UK Will exists.

Use of a trust

Putting property into a trust can be considered, however, it must be remembered that a tax of 6% of the value of the property will be payable every ten years by the trust.

Tax issues surrounding ownership of property are complex and it is always advisable to take advice from an expert in tax law before investing. 

Inheritance Tax and estate planning (…) By Claudio Rodríguez, Tax Counsel European Lawyer and Spanish Abogado (London)

Contact our international tax experts

At Del Canto Chambers, we specialise in international tax, and we can advise foreign nationals of the implications of buying residential property in the UK and their options for mitigating Inheritance Tax and other liabilities.

Del Canto Chambers is a leading London Chambers specialising in tax, international tax and legal affairs, property law, intellectual property, and legal advocacy. 

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