Foreign tax on inheritance

07 / 12 / 2020

Many of our clients have international families and, as a consequence, their UK estates are distributed to beneficiaries in a number of countries. In the UK, HMRC charges an estate to inheritance tax (“IHT”) at a rate of 40% to the extent that the estate’s value exceeds the deceased’s available nil-rate band (subject to any applicable exemptions and reliefs). The executors of the estate have primary responsibility for paying IHT from the assets of the estate before they divide the estate amongst the beneficiaries. In most circumstances, beneficiaries will receive their inheritance free of tax, albeit that the total sum available for distribution to the “residuary” beneficiaries is reduced by the IHT paid on the estate. However, this is not necessarily the case where a beneficiary lives outside of the UK.

In some jurisdictions (such as Ireland), local inheritance tax is levied on the recipient of an inheritance rather than the estate itself. This means that a beneficiary’s inheritance may be charged to tax twice: once to UK IHT in the hands of the executors and once to local tax in the recipient’s own hands. Double taxation relief is unlikely to be available in these circumstances as the taxes payable are neither sufficiently equivalent nor charged to the same taxpayer.

Testators who know that a beneficiary of their Will is or is likely to be resident overseas for a long period should have this in mind when drafting their Wills. Those with Wills already in place may wish to revisit them to ensure that liability for payment of foreign taxes is addressed. Should the recipient beneficiary bear any local inheritance taxes, or should the estate meet these? A Will can be drafted to accommodate either option but specific wording will be needed, particularly if the estate is to bear the tax. There are various factors to consider. If the estate is to meet the cost, this will be to the detriment of other beneficiaries whose inheritance will be reduced by the foreign tax. There may be other ways of benefiting the intended beneficiary of the estate without giving rise to the foreign tax that could be considered.

We would be pleased to speak to clients whose estates and testamentary planning may be subject to such taxation and can advise on any updates to their Wills to ensure that their estates pass in accordance with their wishes.