Resicom – Holiday Investment – 04-21 – LB

Inheritance tax – know the rules

When investing abroad, most perspective buyers tend to be reasonably well informed in relation to tax matters. Stamp duty, income tax and capital gains tax are often considered.

However, a serious matter not to be ignored is inheritance tax (IHT). Often varying wildly across different nations, the tax is an unexpected pitfall for many buyers, most of whom assume they are able to pass on their foreign property to whoever they chose after they have died. However, each country has its own rules as to who should benefit from the death of a friend or relative, and beneficiaries could end up paying huge sums if inheritance tax is not fully considered.

Dan Harris of Stone King, experts in international probate and succession, told A Place in the Sun: ‘Too often, people assume that if they buy a property abroad they can hand it on to whoever they choose. This is rarely the case, because each country has its own rules governing who should benefit when someone dies. IHT in the UK, let alone abroad, is fiendishly complicated, and I would always suggest talking to your UK solicitor or tax adviser, as well as an independent lawyer familiar with the jurisdiction of the country into which you’re buying. Even then, some countries love tinkering with tax law, so what applies today might change tomorrow.’

Spain, one of the most popular countries for foreign investors, especially those of retirement age, has huge IHT variation. Each region has different rules, and regulations can be changeable. For non Spanish residents, who spent less than 183 days per year in the country, making a Spanish will is advised, as it reduces the total IHT tax liability for those in question, Alex Radford, an English solicitor and abogado of Cremades & Calvo-Sotelo, said: ‘If we use the example of a property worth €300,000 (£246,200), and 50 per cent of this (€150,000) is inherited by a spouse or child over the age of 18, the Spanish IHT liability would be €19,119.11 (£15,689.19). A carefully drafted Spanish will leaving the same 50 per cent share to two people – e.g. a surviving spouse and a child – reduces the total IHT tax liability: it would be €12,869 or €6,434.50 each in our example.’ Raford went on to explain that if an unmarried friend or cousin was to inherit a similar share, their IHT liability could reach up to £36,272.77. However, to add to the minefield, rules are different for Spanish residents. Any transfer is subject to Spanish gift or IHT after the death of the property’s owner, and the tax rate can vary according to the value of the estate from 7.65 per cent to up to 34 per cent. The tax also depends on the owner’s relationship with their heir.

France’s inheritance laws appear relatively straightforward. Under French law, a surviving spouse pays no inheritance tax, whilst the closer the relation the less they are forced to pay, with children each having a €100,000 tax free allowance. For siblings, the allowance is a mere €15,932 and for unrelated persons the allowance sits at just €1,594. One factor to consider is to whether you are a resident in the country. If the deceased is, then any worldwide assets they possess, excluding properties outside of France, will be subject to French inheritance law and IHT, whilst if they had been domiciled in the UK, only French properties are subject to their laws.

However, Barbara Heslop, solicitor at A Place in the Sun, who originally examined the subject of inheritance laws for foreign investors, said that this may change. She commented: ‘From 17 August 2015, under the new EU Succession Regulation, non-French individuals who are resident in France have some flexibility in choosing the jurisdiction under which their estate is administered, although French IHT will still be payable.” It is also important for the buyers of a French property to consider options to protect the surviving spouse or partner, such as the adoption of a French marriage regime OR a tontine clause (in which a couple can own a house jointly, and when a co-owner dies, the survivor is deemed to be sole owner of the whole property) before completing their purchase.’

One of the UK’s most popular choices for tourism and second homes is Florida. Operating differently to many EU examples, from the 1st of January 2014, those living in the US, subject to US estate tax on the value of their worldwide assets, will not pay estate tax unless the value of the aforementioned assets exceed $5.34 million, which equates to £3.21 million. Renea Glendinning, head of a international consulting and tax planning practice, explained the circumstances for Brits who are not domiciled in the US. She said: ‘A 1979 Anglo-American Treaty provides that estate tax imposed in the US on a domiciliary of the UK shall be limited to the estate tax that would have been imposed if the decedent had been domiciled in the US at the time of death. Even if no tax is due, the filing of a US estate tax return is required if the value of the US assets exceed $60,000 at the date of death. I’d recommend consulting a UK tax adviser before making any final decisions.’ However, for non-Brits who do not live in the US full time the practice is different, and their beneficiaries’ liability begins at $60,000 above which 26 per cent is payable, which increases to up to 40 per cent on properties valued above $1 million.

However, Inheritance tax is not the only issue that can arise from buying a property abroad. In Portugal, IHT has been abolished since 2004. Instead, inheritance has been made subject to stamp duty which is payable at a rate of 10 per cent. Ricardo Ferreira of Martínez-Echevarría, Pérez & Ferrero law offices in Vilamoura has suggested that deaths should be swiftly reported to the tax department in order to identify heirs and assets, as personal assets of the deceased are exempt from certain tax. He said: ‘The stamp duty is only applicable to the assets based in Portugal. The spouse/husband, descendants and ascendants don’t need to pay the stamp duty. To make the process easier for the heirs, it is advisable for the foreigners to do a will just for the Portuguese assets.’

Thus it can be seen that even in four of the most popular countries for UK investors, inheritance tax is a minefield, and not something to be brushed off. Consulting a lawyer, solicitor or tax advisor is highly recommended, and even then proceeding with caution is advised. As Mr Harris explained ‘Some countries love tinkering with tax law, so what applies today might change tomorrow.’ However, with the correct consideration and approach, there is no reason to allow IHT to complicate an overseas purchase.

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