Inheritance tax Foreign aspects

Inheritance tax Foreign aspects CAPITAL TAXES IHT18

Contents Introduction 1 Domicile 3 Taxable property 5 Settled property 6 Excluded and exempt property 7 Double taxation conventions (DTCs) 9 Further information 12 We have a full range of services for people with disabilities, including leaflets in Braille, audio and large print. For details, please ask your local Inland Revenue office or Enquiry Centre.

This booklet explains how we charge inheritance tax on your foreign assets if you are domiciled in the United Kingdom (UK) or on your UK assets if you are not domiciled in the UK. It also explains the arrangements for relieving double taxation. Introduction Inheritance tax (IHT) is administered by Inland Revenue Capital Taxes. We have three branches that deal with IHT and their addresses are given below. If you write to Capital Taxes, please quote our reference number. If you do not know it, you should give the full name of the person who has died ( the deceased ) and their date of death. Nottingham Inland Revenue Capital Taxes Ferrers House PO Box 38 Nottingham NG2 1BB Edinburgh Inland Revenue Capital Taxes Meldrum House 15 Drumsheugh Gardens Edinburgh EH3 7U Belfast Inland Revenue Capital Taxes Level 3, Dorchester House 52-58 Great Victoria Street Belfast BT2 7QL You can also phone our Helpline on 0845 3020 900. Our advisers deal with genuine queries on inheritance tax, they will not give financial advice or any advice designed to avoid or reduce tax. Our leaflet COP10 Information and advice explains this further. You can get forms and leaflets about inheritance tax free from the Internet at www.inlandrevenue.gov.uk by calling our Orderline on 0845 234 1000 by fax on 0845 234 1010 by e-mailing ir.purchasing@gtnet.gov.uk 1

Who is this leaflet for? This booklet is for anyone who is domiciled in the UK and owns foreign assets, or not domiciled in the UK but owns UK assets. For inheritance tax purposes the Channel Islands and the Isle of Man are outside the UK. If you need to refer to the legislation on any particular point, we have provided the appropriate references in the statute. All the references are to Inheritance Tax Act 1984 (previously the Capital Transfer Act 1984) unless otherwise indicated. References to sections of FA refer to the Finance Act. 2

Domicile You or your personal representatives may be liable to inheritance tax if you transfer anything of value, such as a lifetime gift, or the deemed transfer to your personal representatives on your death. Liability to UK inheritance tax depends on your domicile at the time you make the transfer. Domicile is a legal concept. It is not possible to list all the factors that affect your domicile, but we have explained some of the main points in this chapter. You are domiciled in the country where you have your permanent home. Domicile is different from nationality or residence. You can only have one domicile at any given time. Domicile of origin You normally acquire a domicile of origin from your father when you are born. It need not be the country in which you are born. For example, if you are born in France while your father is working there, but his permanent home is in the UK, your domicile of origin is in the UK. Domicile of dependency Until you can legally change it (see paragraph below) your domicile will be the same as the person on whom you are legally dependent. If that person s domicile changes, you automatically acquire the same domicile, a domicile of dependency, in place of your domicile of origin. Domicile of choice You can legally acquire a new domicile a domicile of choice from the age of 16. To do so, you must leave your current country of domicile and settle in another country, and provide strong evidence that you intend to live there permanently or indefinitely. Living in another country for a long time, although an important factor, does not prove you have acquired a new domicile. 3

Married women Before 1974, when you married you automatically acquired your husband's domicile. After marriage this domicile would change when your husband's domicile changed. If your marriage ended, you kept your husband's domicile until you legally acquired a new domicile. From 1 January 1974 your domicile is not necessarily the same as your husband's domicile. We decide it by the same factors as for any other individual who is able to have an independent domicile. But, if you were married before 1974 and had acquired your husband's domicile, you retain this after 1 January 1974 until you legally acquire a new domicile. Deemed domicile For inheritance tax purposes, there is a concept of deemed domicile. This means even if you are not domiciled in the UK under general law we will treat you as domiciled in the UK at the time of a transfer if you were domiciled in the UK within the three years immediately before the transfer, or you were resident in the UK in at least 17 of the 20 income tax years of assessment ending with the year in which you make a transfer. Resident has the same meaning as for income tax purposes. The rules for determining residence are set out in our booklet IR20 Residents and non-residents. Liability to tax in the United Kingdom. You can get a copy of this from any Inland Revenue Enquiry Centre. The deemed domicile rules do not affect your domicile on death if there was a death duties double taxation agreement or Convention in place before 1975 and it continues to apply (s.267(2)). Nor do these rules apply for the purpose of determining the domicile of a settlor who made a settlement before 10 December 1974. 4

Taxable property If the value of your gift is or the assets in your estate are above the threshold, then you may be liable to inheritance tax. Which assets are taxable in the UK? Generally, if you are domiciled, or deemed to be domiciled, in the UK, inheritance tax applies to your assets wherever they are situated. If you are domiciled abroad, inheritance tax applies only to your UK assets (s.6(1)). However, if you are domiciled abroad there is no charge on excluded assets and we may remove certain other types of UK assets from the tax charge (you can find more information on pages 7 and 8). How do I know where the assets are situated? This is decided according to general law, but subject to any special provisions in a double taxation agreement. The normal rules for the more common types of asset are that rights or interests in or over immovable property (such as land and houses) and chattels (household and personal goods, paintings etc.) are situated where the property is located coins and bank notes are situated wherever they happen to be at the time of the transfer registered shares or securities are situated where they are registered bearer securities are situated where the certificate of title is located at the time of the transfer goodwill is situated where the business, to which it is attached, is carried on an interest in a partnership is situated in the country whose law governs the partnership agreement debts are situated where the debtor resides bank accounts are situated at the branch where the account is kept. 5

Settled property Inheritance tax applies to settled property in the UK. It does not apply to settled property outside the UK, unless the settlor was domiciled, or deemed to be domiciled, in the UK when the property was settled (s.48(3)). The deemed domicile rules do not apply to a taxable reversionary interest in settled property. Inheritance tax is not due if the reversionary interest is situated outside the UK, and the person beneficially entitled to it is domiciled outside the UK (s.48(3)(b)). You can find more information in our leaflet IHT 16 Inheritance tax. Settled property. 6

Excluded and exempt property If you are not domiciled in the UK, we may treat the following types of asset as excluded property and no inheritance tax is chargeable. Government securities Certain British Government securities (also known as FOTRA securities) first issued before 30 April 1996 are exempt from tax if you are neither domiciled nor ordinarily resident in the UK (s.6(2)). If the securities are settled property they are excluded property if the individual beneficiary entitled to an interest in possession in them is neither domiciled nor ordinarily resident in the UK, or if there is no interest in possession, all past, present and future potential beneficiaries are neither domiciled nor ordinarily resident in the UK. For these purposes, domicile means domicile only under general law. The deemed domicile provisions do not apply. For FOTRA securities first issued after 29 April 1996 new conditions apply which mean that your domicile is not relevant. You only need to be not ordinarily resident in the UK to benefit from the exemption. From 6 April 1998 the new conditions apply to all British Government Securities, except 3 1 /2% War Loan 1952 or later. This also applies to securities that are settled property. Authorised unit trusts and open-ended investment companies Holdings in Authorised unit trusts (AUTs) and Open-ended investment companies (OEICs) are excluded property if held by an individual not domiciled in the UK (s.6(1a)) or if held in a trust made by a settlor not domiciled or not deemed domiciled in the UK when making the trust (s.48(3a)). The Channel Islands or Isle of Man If you are domiciled in the Channel Islands or the Isle of Man and hold National Savings Certificates and certain other forms of small savings, they are excluded property (s.6(3)). The deemed domicile provisions do not apply. 7

Visiting forces and staff of allied headquarters Emoluments and tangible movable property of members of visiting forces (other than British citizens, British Dependent Territories citizens or British Overseas citizens) and certain staff of allied headquarters are excluded property (s.155). For inheritance tax purposes, we will not take periods spent on duty in the UK into account in deciding whether a transferor is resident, domiciled or deemed to be domiciled here. Overseas pensions There are special rules about pensions paid to former employees of former colonial governments (s.153). On the death of a former employee any pension payable under Section 273 of the Government of India Act 1935, or an equivalent scheme under Section 2 of the Overseas Pensions Act 1973, is exempt. We treat certain other pension payments and gratuities as being paid abroad and there is no inheritance tax due on the estate of a deceased pensioner who dies whilst domiciled abroad. Foreign currency bank accounts We exclude balances on non-sterling accounts with a bank or the Post Office from inheritance tax on death (s.157) if they are held by an individual not domiciled, resident or ordinarily resident in the UK, or trustees not domiciled, resident or ordinarily resident in the UK on behalf of an individual with an interest in possession in the account, if the settlor was not domiciled in the UK when the settlement was made. Bank has the same meaning given in s.840a of the Taxes Act 1988 (inserted by Schedule 37 para 1 FA 1996). It includes the Bank of England and any institution authorised under the Banking Act 1987. Settled property Settled property situated outside the UK is excluded property if the settlor was domiciled outside the UK at the time the property was settled. Reversionary interests are also generally excluded property. 8

Double taxation conventions (DTCs) What are DTCs for? DTCs are treaties (agreements) which help prevent you being taxed by two countries if both countries have the right to tax the same property when a death occurs or a gift is made. The UK has a number of bilateral DTCs for taxes on estates, gifts and inheritances. How do they work? For the purpose of the agreement, DTCs allow the country in which the transferor is (or in the case of a death, was) domiciled to tax all property wherever it is, and the other country to tax only specified types of property, such as immovable property, in its territory. If you still suffer double taxation, there are rules for deciding which country gives credit for the other s tax. Where, exceptionally, the relief given by a DTC would be less than that given by unilateral relief (you can find more information on pages 10 and 11) we give you the benefit of unilateral relief. Countries with which the UK has a DTC The following DTCs were signed after the introduction of capital transfer tax in 1975, and continue to apply to inheritance tax. Country Date of entry Statutory into force Instrument No. Republic of Ireland 2 October 1978 1978 No. 1107 South Africa 6 May 1979 1979 No. 576 USA 11 November 1979 1979 No. 1454 Netherlands 16 June 1980 1980 No. 706 (amended) 3 June 1996 1996 No. 730 Sweden 19 June 1981 1981 No. 840 (amended) 14 July 1989 1989 No. 986 Switzerland 7 March 1995 1994 No. 3214 Treaties with France, Italy, India and Pakistan were in place before 1975 during the estate duty era and have different rules to eliminate double taxation. 9

You should consult the relevant DTC whenever necessary. You can get them in the form of Statutory from any Stationery Office Bookshop or accredited agent, or Stationery Office Publications Centre PO Box 276 London SW8 5DT. What if there is no double taxation agreement? If a transfer is liable to inheritance tax and also to a similar tax imposed by another country with which the UK does not have an agreement, you may be able to get relief under unilateral relief provisions (s.159). What is unilateral relief and how does it work? We give credit against inheritance tax for the tax charged by another country on assets situated in that country. For this purpose, UK law determines the location of the asset. If the tax that is charged on the asset by the other country exceeds inheritance tax on that asset, we limit the credit to the amount of inheritance tax. We also give credit where both the UK and another country impose tax on assets that are situated in a third country, or both in the UK under UK law and in the other country under that country s law. In these cases the credit is a proportion of the tax. The proportionate credit is computed by the formula A x C (A + B) A is the inheritance tax, B is the overseas tax and C is whichever of A or B is smaller. If the UK and two or more other countries tax the same asset the above applies but with modifications (s.159(4)). 10

Examples of unilateral relief calculations Example 1 Ann is domiciled in Ruritania, but is also treated as domiciled in the UK. She makes a gift of property situated in Utopia. UK inheritance tax (A) 3,000 Ruritanian inheritance tax (B) 1,000 C is the smaller of A and B 1,000 Credit against UK inheritance tax is 3,000 x 1,000 750 ( 3,000 + 1,000) Net UK tax 2,250 Example 2 Tom is domiciled in Utopia but holds shares in a Ruritanian company, which maintains a duplicate share register in the UK. Under UK law we regard the shares as situated in the UK, but Ruritanian law regards them as situated in Ruritania. Tom dies (but his estate is not liable to Utopian tax). UK inheritance tax (A) 1,000 Ruritanian inheritance tax (B) 4,000 C is the smaller of A and B 1,000 Credit against UK inheritance tax is 1,000 x 1,000 200 ( 1,000 + 4,000) Net UK tax 800 11

Further information We produce a wide range of leaflets. Some we have mentioned which you might find useful are COP10 Information and advice IHT16 Inheritance tax. Settled property IR120 Residents and non-residents. Liability to pay tax United Kingdom COP1 Putting things right. How to complain. You can get a copy of the leaflet IHT16 Inheritance tax. Settled property from Inland Revenue Capital Taxes whose addresses are on page 1. Our offices are open from 9.00am to 5.00pm Monday to Friday. Our leaflets are available at www.inlandrevenue.gov.uk and from any Inland Revenue Enquiry Centre. Most are open to the public from 8.30am to 5.00pm, Monday to Friday. Addresses are in your local phone book under Inland Revenue and at www.inlandrevenue.gov.uk/local You can get most of our leaflets from our Orderline, by phone or textphone (for Minicom users) on 0845 9000 404 from 8.00am to 10.00pm, every day except Christmas Day, Boxing Day and New Year s Day fax on 0845 9000 604 completing the on-line order form at www.inlandrevenue.gov.uk/contactus/staustellform.htm writing to PO Box 37 St Austell Cornwall PL25 5YN. Orderline calls are charged at local rates. Please note that the Orderline does not supply IHT leaflets. Your library or Citizens Advice Bureau may also have copies of some of our leaflets, but may not have them all. 12

These notes are for guidance only and reflect the position at the time of writing. They do not affect any right of appeal. Issued by Inland Revenue Marketing and Communications April 2004 Crown Copyright 2004 Printed by The Astron Group 04/04 NSV Code R2P 3321