Inheritance and capital gains tax for non resident

Davidasanga

Hi! My mother lives in Canada but has a house and current account in the UK. She is resident for tax purposes in Canada.  Her husband (my father) died a couple of years ago in Canada.  We are wondering what the inheritance tax threshold is for her estate in the UK? My father didn't use any of his threshold when he died as he passed on all his assets to my mother. Does this mean that the threshold will be £325000 x 2= £650000? This 'doube threshold' applies even to non-residents with assets in the UK? Also, her property in the UK has gone up in value considerably since she bought it in 2009. If she sells it while still alive, we assume she will have to pay capital gains tax. However is it correct that there is not capital gains tax payable on the property if it is sold after she dies, except for tax on any increase in the value of the property from the day she dies until the date of sale? Many thanks for any light anyone can shed on this!

Jeremy535897

The critical question for inheritance tax is where your mother is domiciled. This was also relevant for your father. Domicile is where your permanent home is, but you can also have a deemed UK domicile if you were resident in the UK for 15 out of the previous 20 years. It is also harder to shed a domicile of origin (normally a person's domicile of origin is where their father was domiciled at the time of their birth). For more detail see
https://www.litrg.org.uk/tax-guides/migrants/residence-and-domicile/where-am-i-domiciled

Assuming that neither of your parents was/is domiciled, or deemed domiciled, in the UK, the £325,000 nil rate band of your father is available for transfer, because from what you say he left no UK situated assets to anyone other than his spouse. See the Abdul example at:
https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm43042

Davidasanga

Thanks, Jeremy! Your clear answer confirms what I thought. Yes, you are right, neither of my parents was/is domiciled in the UK. They have been resident in Canada for 50 years.

Davidasanga

One further question. My mother is not domiciled in the UK so presumably her house in the UK is not her primary residence for capital gains tax putposes. My understanding is that she would have to pay capital gains on most of the increased value of the house (about £160000) if she sells the house prior to her death. However, if the house is sold after her death as part of her estate, capital gains is paid only on any increase in the value of the house that occurs between her death and the sale of the property. Am I correct? 'm asking because this may  influence her decision about whether to seel the house now.  

Jeremy535897

It will depend on the facts. Inheritance tax is worse than capital gains tax, so disposing of the property before death and replacing it with a non-UK situated asset would be the better choice if there was a substantial inheritance tax cost. However, I suspect that the property and other UK assets will be within the nil rate band?

For an outright disposal of a UK property you have to value it at 5 April 2015, as only the gain arising from that date is taxable, so that may reduce the gain. You also need to consider the Canadian tax liability, because if this is equal to or greater than the UK liability, the overall tax should be the same, as Canada should give full credit for the UK tax paid (article 21 of the UK-Canada double tax agreement). If, however, there would be an increased overall tax liability, the UK tax can be reduced by waiting until after death to sell the property.

If you sought to argue that the UK house were the primary residence, that would throw grave doubt on the question of where her domicile is.

There are detailed reporting requirements. See:
https://www.gov.uk/government/publications/non-resident-capital-gains-for-land-and-property-in-the-uk-self-assessment-helpsheet-hs307/non-resident-capital-gains-for-land-and-property-in-the-uk-self-assessment-helpsheet-hs307

Davidasanga

Thanks again, Jeremy. I really appreciate your detailed explanation. That has been very helpful. Best wishes, David

Davidasanga

Yes, you are right that the property and other UK assets are within the nil rate band.