This article featured in the Yorkshire Post on Saturday 22nd September 2007.

Inheritance tax and overseas properties

Robert Peel Tax Consultant

It is estimated that a million Britons now own a property overseas with France and Spain being the most popular countries to not only own holiday homes but also as retirement destinations.

Property prices abroad are rising rapidly and when owning property overseas you should bear in mind the inheritance tax and administrative consequences of owning property offshore.

The first point to bear in mind is that retiring abroad may not help you avoid inheritance tax when you die. The UK tax authorities may still seek to charge inheritance tax despite the fact that you are no longer resident in the UK. In looking at whether you are liable to inheritance tax the UK tax authorities do not look at physical residence in the UK but consider a concept known as domicile. If you are deemed to have a UK domicile the Revenue will demand inheritance tax on your worldwide assets and not just on your UK based assets. Domicile for UK tax purposes is hard to change and most Britons owning overseas properties will have retained UK domicile, even those who have retired abroad and thought that they had avoided the UK tax authorities.

Most UK taxpayers acquire a UK domicile at birth, known as their “Domicile of Origin”. In order to change this to a “Domicile of Choice” you must convince the UK authorities that you have abandoned your domicile of origin and have acquired a domicile of choice in another country. To do this there are two steps that need to be followed. First of all you need to formally notify and agree your decision with the UK authorities by filing a form DOM1. Secondly you need to sever all ties with the UK by closing all British bank account, selling any UK property and even making funeral arrangements abroad. The Revenue can successfully argue that you have retained a UK Domicile if your intention is to return to the UK at any point in the future even if that is for burial in the UK.

Even if you have no intention of abandoning your UK domicile, maybe all you want is to acquire an offshore property for family holidays, then you still need to consider Wills and Inheritance Tax. If you have an offshore property you will need a locally drafted Will to deal with the offshore property. Some countries have different inheritance laws and you will need to take advice locally about what can and cannot be left to your family. If you do not have a local will it can make the administration of the Estate extremely expensive and time consuming and may involve your executors getting UK wills and documents translated and may even mean them travelling to the foreign country to swear documents before a local notary. Also bear in mind that if you have a foreign will you will need to update your UK Will to ensure that the execution of a foreign Will has not invalidated your UK Will.

Finally, do bear in mind that that there may be inheritance tax to pay locally on a foreign property and this foreign tax may or may not be available to set off against any UK inheritance tax liability so you could be faced with a double tax charge in both the UK and the foreign country.

Whether you intend to remain UK domiciled or want to sever all ties with the UK it is important to obtain specialist advice in both the UK and locally about the consequences of buying and owning property abroad from both a Will and tax perspective. The consequences of not taking advice could have serious implications from not only a tax point of view but also could result in increased time and expense having to be spent sorting out the administration of the estate in both in the UK and abroad.

Robert Peel is senior manager specialising in inheritance tax planning at Garbutt & Elliott, Chartered Accountants, (0113 2739600) and York (01904 464100).