UK Inheritance Tax For Non Residents

Despite the current turmoil in the UK residential property market, the UK remains an attractive proposition for overseas investors.  A large part of this attractiveness is based on the relatively robust legal framework for property transactions in the UK.  

It is apparent when talking to prospective investors based overseas, that UK IHT considerations are often overlooked or misunderstood by non -UK resident investors.  IHT is payable either on death or when lifetime transfers are made.

If it is assumed that a non -UK resident investor is non-domiciled, then IHT will only be payable on UK-based assets e.g. UK property or bank accounts.  It must be stressed that the potential to be deemed to be UK-domiciled, even for a non -UK resident can be far-reaching.  The concept of domicile is concerned with establishing what is considered to be the permanent home. 

The basic rules for domicile state that an individual will be treated as domiciled in the UK if either of the following applies:

• Living in the UK for 15 of the last 20 years.
• A permanent home in the UK at any time in the last 3 years of their life.

The effect for a non -UK resident of being treated as UK domiciled, is that all their worldwide assets will become part of their UK estate for IHT purposes.  The inclusion of non -UK assets in an estate taxed for IHT in the UK will almost certainly give rise to an element of double taxation i.e. tax in the UK and the overseas country.  Subject to Double Taxation agreements between the UK and the other country of residence, relief may be available to alleviate this double taxation.  

Given the above, if a non -UK resident has had a UK presence prior to establishing non-UK residence, careful planning needs to be undertaken to reduce exposure to IHT in the UK on lifetime transfers.  Clearly, if lifetime transfers are being considered following from exiting the UK, timing will be vital. 

Prior to 2017 overseas investors into UK residential property could avoid UK IHT by holding property indirectly e.g. a non-UK trust holding shares in a non-UK company.  Changes to the excluded property rules for IHT and the introduction of the Annual Tax on Enveloped dwellings have negated the effectiveness of this strategy.

Irrespective of domicile, a non -UK resident property investor’s… estate will to be entitled to deduct the IHT nil rate band, currently £325,000 from the value of their UK estate.  

In cases where the UK assets are less than the IHT nil rate band it is possible to transfer all or part of the nil rate band to a surviving spouse or civil partner.  So, if the deceased’s estate consists of a UK residential property with a value at death of £400,000, subject to the terms of any will, there could be 2 nil rate bands available upon the second death, i.e. £650,000.  There are separate rules to consider affecting the transfer of the nil rate band and spouse exemption, where one of the spouses was UK domiciled. 

In certain circumstances, residential property can be held in a Family Investment company.  This is a standard UK company with specific entitlements and rights attached to different classes of shares e.g A,B, and C.

One class of shares usually carries the voting rights and entitlement to income (A shares) and another class of shares (B shares) are entitled to any growth in shares based on property price increases.  

To mitigate IHT in the UK an overseas property investor would be effectively freezing his UK IHT share value at the point the property is introduced into the company.  

This type of planning is known as a FIC and is best set up at the outset of the property investment.  It is possible to implement a FIC after the initial investment has already taken place but there other UK taxes which will need to be considered in these circumstances, e.g. SDLT and CGT.

A detailed explanation of a FIC can be found on our website:

Property Investment Company and Inheritance Tax – UK Landlord Tax

As it often the case with tax, a non -UK resident planning to reduce UK IHT liabilities needs to consider all possible issues involving a range of UK taxes, as well as tax issues in their country of residence.

If any readers who are non-UK resident investors in UK residential property, require assistance with potential IHT in the UK or any other UK taxes please contact the team at UK Landlord Tax on 01902 711370 or email enquiries@uklandlordtax.co.uk

If you enjoyed this article you should read about how landlords should handle property losses or about stamp duty on transfer of property to limited company next

Thandi Nicholls Ltd
Creative Industries Centre
Glaisher Drive
Wolverhampton
West Midlands
WV10 9TG