Owning a property abroad
Have you taken the basic financial precautions?

For Britons who own a property abroad, one of the most overlooked aspects concerns inheritance tax (IHT). Many people are unaware that an overseas property can be taxed twice - in Britain and locally. Whether your property is a holiday home, an investment property or a place to retire to, it is important to look at IHT planning, as there are steps you can take to mitigate this liability, particularly if you are hoping to retire abroad.

Ideally, you should take these steps before moving, as your options will be seriously curtailed once you have left the UK. Two common mistakes are made by those buying overseas. Firstly, there is an assumption that because the property is overseas it is out of the reach of the UK tax authorities, which is not the case. Secondly, people make the mistake of overlooking the local tax rules that will be applied on the death of one of the property’s owners.

Many people assume that HM Revenue & Customs (HMRC) cannot levy a charge on overseas property, particularly if they live or have retired abroad and are no longer deemed resident in the UK for tax purposes.

If you are ‘UK-domiciled’ HMRC will look at your worldwide assets when calculating an inheritance tax liability. And assets over the current IHT threshold could be taxed at 40 per cent, including any overseas property or shares in a property you own.

To be deemed ‘non-resident’, you have to work abroad for a full tax year and spend no more than an average of 90 days a year in Britain. But individuals acquire a ‘domicile of origin’ at birth, which is normally the country in which they were born, and it is far harder to change this at a later date, even if you live abroad for years. Most expats remain UK-domiciled, particularly those who retire overseas. The Chancellor announced in his Pre-Budget Report constraints on Britons living abroad, who make frequent return visits to the UK. The existing rules, which allow individuals to spend 90 days in the UK, without becoming taxable as a resident, will be amended and days of arrival and departure will count as days spent in the UK.

If you want to be domiciled in the country to which you have retired, you must submit a DOM1 form from your local revenue and customs office and sever all ties. This means closing all British bank accounts, selling all assets in Britain and even organising your funeral abroad. If you are granted a new domicile of choice, it takes three years for the loss of UK domicile to become effective for IHT purposes.

But there are some financial advantages to cutting these ties. Once you are no longer domiciled in Britain, you can create a discretionary property trust, and any asset held within this will not be subject to IHT, even if you later return to Britain and become domiciled again.

All property owners should ensure they have a Will drafted both in the UK and in the local country. This should take account of both the local IHT rules and any ‘succession rules.’

It may also be possible to avoid paying tax on a property twice by taking advantage of the double-taxation treaties Britain has with various overseas countries. For example, there is an arrangement like this with France, so any tax paid there is deducted from the amount due in Britain on your worldwide assets. But there is no similar agreement with Spain.

If you require any further information about the services that we provide or would like to review your financial planning position, please email or contact us.

Levels and bases of, and reliefs from, taxation are subject to change.