Guide for transferring inheritance proceeds from overseas
Inheritance from an overseas family member
There are plenty of commonly held misconceptions when it comes to inheriting money from an overseas relative and then transferring this money back home. Our guide below looks at the US and UK specifically.
In fact for the UK for example, a study conducted by Skandia International revealed that 70 per cent of financial advisers have clients who believe assets held abroad are not subject to UK inheritance tax. Furthermore, many British nationals who have emigrated assume - incorrectly - that their tax liabilities are altered because of their change in residence.
Fortunately, we're here to offer guidance on some of the most frequent pitfalls involved in inheriting the money and assets your foreign-based family members wanted you to have.
What inheritance tax rules apply in the UK when a relative dies abroad?
Four rules on inheritance tax typically apply when someone living abroad dies and leaves money to a relative back in the UK. These are: where they were domiciled; whether or not they have any excluded assets; the location of their assets; and if the assets were "settled" - that is, placed in trust.
Generally speaking, a person is domiciled in the country where their permanent home is located. As such, someone can normally only have one domicile at any given time. People can choose to be domiciled outside of the UK if they meet two criteria: they are at least 16 years old and they've left the UK in order to settle permanently in another country.
But that's not the end of the matter. If someone from the UK does choose to move abroad, HM Revenue and Customs (HMRC) will still regard the UK as their official domicile for inheritance tax purposes unless they've either had their permanent home in another country for at least three years, or been resident outside of the UK for a minimum of four of the last 20 income tax years. If those two conditions are met, any assets they leave won't be subject to UK inheritance tax.
However, it's important to note that HMRC won't recognise a change of domicile unless there's strong evidence that the person in question has severed ties with the UK and genuinely intends to live abroad indefinitely. This could mean owning a property abroad, working in another country and sending their children to an overseas school.
What assets are subject to inheritance tax for UK tax rules?
In the case of settled assets, any outside the UK that were placed in trust while the settlor - or the person who set up the trust - was domiciled in the UK are subject to inheritance tax. However, inheritance tax isn't payable on some assets situated in this country for people domiciled abroad, such as British government securities (provided the person wasn't ordinarily a UK resident); non-sterling bank or Post Office accounts; and holdings in open-ended investment companies and authorised unit trusts.
Estate taxes in the US
In the US, The Estate Tax is the tax assessed on property transferred at a person’s death. The fair market value of these items is used which may be very different to what was originally paid for the assets. The total of these assets is your "Gross Estate." which can include cash and securities, real estate, insurance, trusts, annuities, business interests and other assets.
Certain deductions are allowed to get to the value of the "Taxable Estate" which could include for example mortgages and other debts, estate administration expenses and qualified charities. According to the US IRS website, once this net amount is calculated, the value of lifetime taxable gifts (starting with gifts made in 1977) is added to this number and the tax is computed. The available unified credit may then reduce the tax. Filings are required dependent on the size of the estate.
All the information provided above is simply guidance as referenced to on the UK and US government websites and care should be taken to receive formal advice on any estate or inheritance planning before you consider transferring money received from inheritance overseas.