This article first published by The Gazette.
When a loved one dies, one of the most important things that need to be done with regards to the deceased’s estate (money, property, and possessions) is the payment of inheritance tax (IHT).
If the deceased owned any overseas property, tax liability (especially IHT) becomes even more complex, not least as there could potentially be two countries taxing the same property.
However, depending on specific requirements being met, double taxation treaties provide a relief that may ease the situation and allow you to avoid or reclaim certain taxes, including IHT.
Double Taxation Relief is listed in the appropriate treaty of each country. For example, the treaty for the USA states that: property of a person domiciled in the UK which becomes comprised in a settlement shall be exempt from tax in the UK to the extent of 50% of the value transferred. (Please note there are other requirements that must be met before this can apply.)
Double taxation conventions allow the country where the deceased was domiciled to tax all the deceased’s property no matter where in the world it is situated. The country where the property is physically situated is only allowed to tax specific types of property, for example, immovable property.
The UK has double taxation conventions with ten countries around the world:
The treaties for these countries (identified here with the treaty reference code) state that wherever the deceased was domiciled, then that country is entitled to tax the whole estate. The other country can only tax any property which is situated in their country. Relief will then be available for any property which suffers double taxation.
If there is no double taxation agreement with a country, relief can still be obtained for any property on which tax has already been paid, and this is known as Unilateral Relief.
This fictional scenario explains and illustrates how this Relief works:
Lizzie died on 6 May 2014. Her estate amounts to £500,000 and includes an apartment in Themyscira which is valued at £35,000. Her executor, Sid, has already paid a tax of £1,500 in Themyscira.
In order to calculate the portion of IHT attributable to the apartment, the formula used is: value of asset/total value of the estate x IHT
Therefore, for our scenario: 35,000/500,000 x 70,000 = £4,900
Sid paid £1,500 so, under the Unilateral Relief the total amount of credit allowed against UK IHT is limited to the £1,500 that he has already paid. If the Themyscira tax paid had been £10,000, the credit would be limited to £4,900 being the amount of UK IHT paid.
It is important to note that:
*A is the amount of the inheritance tax, B is the overseas tax, and C is whichever of A and B is the smaller; as illustrated by this example:
Poe is domiciled in Krypton but is also treated as domiciled in the UK. She makes a gift of property which is sited in Atlantis:
Applying the formula, credit against UK IHT is: 3000/4000 x 1000
Finally, if relief can be obtained under section 159 (Unilateral Relief) and section 158 (Double Taxation Conventions) of the Inheritance Tax Act 1984, then relief is given under whichever section will give the greater relief.
Alana Graham is a Barrister in the Private Client team at Lodders a specialist in wills, trusts, tax planning, and tax issues, including Inheritance tax, Capital Gains Tax, VAT, Stamp Duty Land Tax, and estate planning.
This article was first published in The Gazette, read it here.Contact us
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