There is a common misconception that bank accounts and other assets which are held outside of the United Kingdom are exempt from inheritance tax. Except for some limited exceptions, this is not the case. For people who are (deemed to be) domiciled in the United Kingdom, their estates are liable to pay inheritance tax on their death based on the value of their worldwide assets.
Even if you consider yourself to be domiciled outside of the United Kingdom, you will be deemed to be domiciled here if you have been domiciled in the United Kingdom under the general law within the three years preceding death, or resident in the United Kingdom in not less than seventeen out of the twenty years of assessment ending on your death.
On your death, your personal representatives are required to provide HM Revenue & Customs with details of your worldwide assets. This is to assess the liability to pay inheritance tax.
If you are not United Kingdom domiciled or deemed to be so, then foreign assets escape liability to inheritance tax. In that case, only your United Kingdom assets would be liable although there may be a liability abroad. But if your personal representatives claim that you are non-United Kingdom domiciled then the inheritance tax return has to be checked by HM Revenue & Customs before the personal representatives can apply for the grant of probate.
It is common for assets to be invested abroad during an individual’s lifetime. There may be income tax or capital gains tax advantages to this. However, there may be additional hurdles for your personal representatives recovering those assets after your death.
It may be necessary for the personal representatives to obtain the equivalent of the grant of probate in the country in which those assets are located. This may require the payment of local taxes and possibly instructing a local lawyer to act for them in the process.
Further, those assets abroad may be subject to the rules of succession applying to assets held in that country. In many European countries, this can involve aspects of forced heirship which mean that you cannot freely leave your assets to others in the way that you can under English law.
There may therefore be delays accessing assets which may create difficulties in paying the tax. While there are some double taxation treaties, they are not identical. In other cases HM Revenue & Customs must give credit for tax paid abroad which is of a similar nature to inheritance tax.
It is important therefore to ensure that you take appropriate advice when investing outside the United Kingdom. This includes being aware of the tax implications during your lifetime which will usually require you to declare any income from those assets in the United Kingdom. You should also take advice as to whether you need to update your will, or even make a will in the country in which the assets are located.
Jacqueline Almond is a partner at IBB Solicitors