Inheritance Tax on Foreign Property: How UK Expats Can Reduce Liability

For UK expatriates, navigating Inheritance Tax (IHT) on foreign property can be complex. If you own overseas assets, understanding your tax liabilities is crucial to ensuring that your estate is passed on efficiently to your beneficiaries. In this guide, we’ll explore how UK expats can reduce inheritance tax liability on foreign property, including key considerations and strategies to protect your wealth.

Do UK Expats Pay Inheritance Tax on Foreign Property?

Yes, UK Inheritance Tax applies to worldwide assets, including foreign property, if you are deemed UK-domiciled. Domicile is different from residency—it refers to your long-term home, and HMRC may still consider you UK-domiciled even if you have lived abroad for years. If you are deemed a UK domicile at the time of your death, your global assets, including property overseas, could be subject to 40% inheritance tax on amounts above the £325,000 threshold.

However, if you have acquired a domicile of choice in another country, only your UK assets may be liable for IHT. Determining your domicile status is key to understanding your liability.

How to Reduce Inheritance Tax on Foreign Property

Inheritance tax (IHT) on foreign property can significantly impact the wealth you pass on to your beneficiaries. However, with careful planning, UK expats can take advantage of various strategies to minimise their tax burden. From changing your domicile status to using tax treaties, trusts, and life insurance, there are multiple ways to structure your estate more efficiently. Here are a few key approaches to reducing IHT on foreign assets and ensuring your estate is protected for future generations.

Changing Your Domicile Status

For UK expats looking to reduce their inheritance tax (IHT) liability on foreign property, establishing a domicile of choice outside the UK can be one of the most effective strategies. Domicile is a legal concept distinct from residency—it refers to the country considered your permanent home. Even if you have lived abroad for years, HMRC may still classify you as UK-domiciled, making your worldwide assets liable for UK IHT.

To successfully change your domicile, you must provide clear evidence that you have cut significant ties with the UK and intend to remain in your new country indefinitely. This can include:

• Long-term residency abroad: Living in another country for many years without any plans to return to the UK.
• Disposal of UK assets: Selling your UK property and closing UK-based bank accounts and investments.
• Citizenship or permanent residency: Obtaining legal status in your new country, such as permanent residency or citizenship.
• Estate planning adjustments: Ensuring your Will, tax filings, and financial affairs are structured according to the tax laws of your new country rather than the UK.

Be aware that HMRC scrutinises domicile claims carefully—particularly if you retain financial ties to the UK. If there is any doubt about your status, seeking professional legal and tax advice can help ensure your affairs are properly structured to support your claim.

Taking Advantage of Double Tax Treaties

The risk of being taxed twice on the same foreign property is a major concern for UK expats. However, many countries have double tax treaties with the UK, designed to prevent this situation and provide relief for taxpayers.

A double tax treaty ensures that if inheritance tax is charged on foreign property in another country, you may be able to offset that liability against your UK IHT bill. Some of the key jurisdictions that have inheritance tax treaties with the UK include:

• France – Provides mechanisms to avoid double taxation and allocate tax relief.
• Italy – Offers provisions to prevent both UK and Italian tax authorities from taxing the same assets.
• India – Ensures that inheritance tax paid in India can be credited against UK IHT liabilities.

If your foreign property is located in a country without a tax treaty, you may need to take additional steps to mitigate tax exposure. A tax specialist familiar with both jurisdictions can help you navigate these complexities and ensure you are not overpaying.

Gifting Foreign Property Before Death

One of the most effective ways to minimise inheritance tax liability is by gifting foreign property to your heirs before your death. In the UK, any assets gifted more than seven years before death are considered outside of your taxable estate and are exempt from IHT.

However, gifting rules vary significantly by country. Before transferring property, it is crucial to check the local tax implications in the country where the asset is located. Some key considerations include:

• Local gift tax laws: Some countries impose gift tax on property transfers, which could create an unexpected tax bill.
• Seven-year rule in the UK: If the donor dies within seven years of making the gift, a taper relief system applies, gradually reducing the tax burden based on how many years have passed.
• Legal formalities: Some countries require notarised contracts or specific documentation to transfer property ownership as a gift legally.

If gifting is a viable option, planning early and structuring the transfer correctly can significantly reduce inheritance tax exposure while ensuring your heirs benefit fully from the assets.

Placing Foreign Property in a Trust

Trusts can be a valuable tool for managing foreign property and shielding it from inheritance tax. By placing an asset into a trust, the property no longer forms part of your personal estate, which can reduce IHT liability.

However, UK anti-avoidance laws are stringent, and not all trust structures will be effective for tax planning. Some important considerations include:

• Types of trusts: Different trust structures have varying tax treatments. For example, discretionary trusts can provide flexibility, but they may still be subject to periodic UK inheritance tax charges.
• Jurisdictional issues: Some countries do not recognise trusts, or they may impose local taxes that make trusts less beneficial.
• Control of the asset: Once placed in a trust, you may lose direct control of the property, as trustees will manage it according to the terms of the trust deed.

Given the complexities of trust laws, it is essential to seek expert financial and legal advice before setting up a trust to ensure it provides the intended tax benefits.

Purchasing Foreign Property Through a Company

Another potential strategy for mitigating IHT on foreign property is buying real estate through an offshore company. This method is commonly used in countries such as Spain and Portugal, where company ownership structures can offer tax advantages.

The key benefits of purchasing foreign property through a company include:

• Avoidance of inheritance tax in some jurisdictions: In certain countries, transferring shares of a company (which owns the property) can bypass local inheritance tax rules.
• Potential tax efficiency: In some cases, company structures can reduce liability for capital gains tax or local property taxes.
• Privacy and asset protection: A corporate structure may provide additional privacy and protection for estate planning.

However, tax laws change frequently, and some countries have introduced measures to close loopholes related to company-owned real estate. The UK has also implemented anti-avoidance rules for property held in offshore structures, so careful planning is necessary to ensure long-term tax efficiency.

Using Life Insurance to Cover Inheritance Tax Costs

If it is not possible to reduce your inheritance tax liability on foreign property, taking out a life insurance policy can provide a way to cover the tax bill without forcing your heirs to sell assets.

A whole-of-life insurance policy can be structured to pay out a lump sum that covers the estimated IHT due upon your death. Key benefits of this approach include:

• Immediate funds for tax payments: Beneficiaries can use the payout to settle inheritance tax bills without selling property or other assets.
• Flexibility in estate planning: Life insurance can help ensure that your heirs receive the full value of your estate without financial hardship.
• Potential tax efficiency: If the policy is placed in a trust, the payout may be excluded from your taxable estate.

While life insurance does not reduce the tax burden, it ensures that your estate remains intact, and your heirs are not forced into making difficult financial decisions.

Country-Specific Inheritance Tax Rules

Inheritance tax (IHT) laws vary significantly between countries, and UK expats must understand both local tax obligations and their potential UK IHT liability. Wherever your foreign property is located, it’s essential to seek professional tax advice tailored to that jurisdiction, however, these key points should give you some idea of how things work and the key inheritance tax rules for Spain, France, and Portugal—three of the most popular destinations for British expatriates.

Spain

In Spain, Inheritance and Gift Tax (Impuesto sobre Sucesiones y Donaciones – ISD) applies to anyone inheriting assets, including foreign nationals. However, inheritance tax in Spain is highly decentralised, meaning each of Spain’s 17 autonomous regions has its own tax regulations, exemptions, and allowances.

Key Points:

• Who pays Spanish inheritance tax?
  If the deceased was a Spanish tax resident, all worldwide assets may be subject to ISD. If the deceased was a non-resident, only assets located in Spain (such as property) are taxable.
• Tax rates and allowances vary by region:
  Some regions, such as Madrid and Andalusia, offer significant inheritance tax reductions or exemptions for close family members. However, other regions, such as Catalonia and Valencia, impose higher tax rates with fewer reliefs.
• Relationship to the deceased affects taxation:
  Spanish law divides heirs into different groups based on their relationship to the deceased, with immediate family members benefiting from lower tax rates and higher exemptions, while distant relatives and non-family members face higher tax liabilities.
• UK-Spain double tax treaty relief:
  Spain does not have a specific double tax treaty with the UK for inheritance tax, but tax relief may be available to avoid double taxation if IHT is also due in the UK.

Inheritance Planning Considerations:

• Non-residents may face higher taxes, as they cannot benefit from some of the regional tax reliefs available to residents.
• Forced heirship laws do not apply in Spain, so British expats can distribute their estate freely via a legally recognised Will.

France

French inheritance law follows a strict forced heirship system, meaning that children automatically have a legal right to inherit a portion of their parent’s estate. Unlike the UK, where assets can generally be passed freely according to a Will, in France, you cannot fully disinherit your children unless specific legal structures are put in place.

Key Points:

Forced heirship laws:

• If the deceased has one child, they must inherit at least 50% of the estate.
• If there are two children, they must inherit at least two-thirds.
• If there are three or more children, they must inherit at least three-quarters.
• The remaining portion (if any) is freely disposable by the deceased.

Inheritance tax rates range from 5% to 45%:

• Spouses and civil partners are exempt from French inheritance tax.
• Children inherit at progressive rates from 5% to 45%, with an exemption of €100,000 per child.
• Non-relatives and distant heirs (such as stepchildren or unmarried partners) may face a flat 60% tax rate.

UK-French double tax treaty:
Unlike Spain, France has a specific inheritance tax treaty with the UK, which allows tax paid in one country to be offset against tax due in the other.

Inheritance Planning Considerations:

• Setting up a French property under joint ownership structures, trusts, or assurance vie (life insurance policies) may help navigate inheritance tax liabilities and forced heirship laws.
• Foreign Wills must be carefully structured to comply with French succession rules while respecting UK estate planning.

Portugal

Portugal is one of the most inheritance tax-friendly countries for UK expats. Unlike Spain and France, Portugal does not levy traditional inheritance tax (Imposto sobre Sucessões e Doações). Instead, a stamp duty applies in some cases.

Key Points:

No inheritance tax for direct family members:

• Spouses, children, and parents are exempt from any inheritance tax.
• This makes Portugal particularly attractive for British expats with family-based succession plans.

Stamp duty of 10% on other beneficiaries:

• If the heir is not an immediate family member (e.g., siblings, distant relatives, or friends), they must pay a 10% stamp duty on inherited assets, including property.

UK domiciled individuals may still be liable for UK IHT:

• If a UK expat remains UK-domiciled, UK IHT applies to their worldwide estate, including any property in Portugal.

Portugal does not have a specific inheritance tax treaty with the UK, meaning tax planning must be carefully structured to prevent double taxation.

Inheritance Planning Considerations:

• Portuguese tax residency does not exempt you from UK IHT unless you have successfully changed your domicile.
• Gifting property before death may be an effective strategy, as Portugal’s tax rules favour lifetime gifts over posthumous inheritance.

Help With Inheritance Tax on Foreign Properties

UK expats must carefully plan to mitigate inheritance tax on foreign property. Seeking expert financial advice can help you understand your liabilities and implement strategies to reduce the tax burden on your beneficiaries. Whether through domicile planning, trusts, gifting, or life insurance, taking proactive steps now can safeguard your estate for the future.

Careful financial planning is key to managing how much inheritance tax is paid on foreign properties. Working with a tax expert and an experienced financial adviser ensures that you explore all available options to reduce the amount of IHT due as much as possible. Get in touch today, and one of Blacktower’s financial advisers  will be happy to guide you through the best solutions for your individual circumstances. With the right advice, you can protect your family’s future and preserve your legacy in the most tax-efficient way.

Disclaimer: The information provided in this article is for general informational purposes only and does not constitute financial or tax advice. The laws surrounding inheritance tax and domicile status are complex and subject to change. It is recommended to seek advice from qualified tax advisors and financial advisers tailored to specific circumstances. 

Sources

• UK Government (HMRC) – Inheritance Tax
• Inheritance Tax in Spain (UK Guide) – Wise
• Planning Your Cross-Border Inheritance in the EU – European Union
• How Is UK Inheritance Taxed in France? – The Wealth Genesis
• Inheritance Tax in Portugal (UK Guide) – Wise
• Understanding UK Inheritance Tax on Overseas Property – UK Property Accountants
• How Does Inheritance Tax Work for UK Expats? – The Gazette