Tax implications of inheriting foreign property

chssvl

Hi all. I have been living (and have been a sole tax resident of the UK) for almost 12 years now (have also been a UK citizen for over six).

My father has recently passed away and, talking to a local accountant, he explained that I will probably need to inherit part of his estate - I'm an only child so my mom will inherit half and I will inherit the other half, which roughly translates into ownership of the flat where they've lived.

According to local inheritance rules, I will not have to pay any taxes, but only because the value of the inherited assets falls below the threshold from which inheritance taxes are due (i.e. I will pay inheritance taxes according to local tax rules, it just so happens that these work out to be zero).

My understanding is that there will not be any UK-tax implications as the estate is paying inheritance taxes as per the local rules. I just wanted to check if that is indeed the case.

My mother will continue living in the flat and, of course, I will not be charging any rent or anything, therefore, I will not be generating any revenue from the asset. However, are there any potential future tax implications? e.g. if we were to sell the flat or rent it out?

The accountant explained that any future rent or capital gains from a sale will be taxed locally as per local tax rules, even if I am a tax resident in another country (from now on I will need to do the equivalent of a self-assessment). Also, the UK and my country of origin have a double taxation treaty, so I assume that whatever happens, things will only get taxed once.

Thanks in advance

Jeremy535897

I am assuming that your parents are neither domiciled nor resident in the UK for tax purposes, and the flat is not situated in the UK? If that is the case, inheritance tax cannot apply to your father's estate on death. Your share of the flat will form part of your estate for inheritance tax purposes on death, as presumably you are domiciled in the UK for tax purposes.

Double taxation treaties almost always follow the same format when it come to rental income and capital gains. They usually provide that the country where the property is situated, and the country of residence of the property owner, may tax the rental income and capital gains. The country of residence usually gives credit (up to the liability in the country of residence) for the tax paid in the country where the property is situated. You therefore end up paying the higher of the two countries' tax rates.

chssvl

Thanks. Indeed, my parent's aren't British nor have they lived in the UK and the flat is not in the UK either.

And thanks for the clarification on the double-taxation treaty. Thought tax just got paid in one country and that was it, but this makes more sense - avoiding tax arbitrage. thanks again!

EdSwippet

One further note. You haven't stated which non-UK country, but be aware that some countries tax real estate gains more heavily to non-residents than residents. For example, the US; the Foreign Investment in Real Property Tax Act (FIRPTA) rule taxes real estate capital gains made by non-US investors at high income tax rates, rather than low capital gains tax rates.

Treaties may also be flimsy protection at times. FIRPTA  explicitly and unilaterally overrides (reneges on) US tax treaties, although most US treaties that have since been (re)negotiated since accommodate FIRPTA. Some countries are not fully reliable treaty partners.

chssvl

Thanks. No, it's not the US. It's actually a South American country, which has a laxer tax regime, at least compared to the US.

I actually had a follow up question. Does repatriation of the proceeds and/or the assets make any difference? If I keep any rent or any gains in the country of origin and never bring them into the UK, will they be sheltered from HMRC?

This is a relevant question as my wife and I have considered that, upon retirement, we might come back as our measly defined contribution pensions in £ will probably allow us a better standard of living than in the UK. Therefore, any additional income/gains generated by these assets (and, of course, taxed locally) would be an additional boost.

Thanks again! 

Jeremy535897

At present, having become a citizen of the UK, and having been resident here for 12 years, you will probably have become domiciled in the UK for tax purposes, and even if you haven't, you will probably be deemed domiciled here. See:
https://www.gov.uk/guidance/deemed-domicile-rules

That means that it is irrelevant whether you remit monies to the UK or not, as you will be taxed on worldwide income on an arising basis.

chssvl

Ah, of course. Forgot all the commotion with the non-dom status of Sunak's wife.

One (hopefully final) follow-up question. This is probably too premature as who knows what the tax rules will be like some 20 years from now when we (hopefully) retire, but how does one stop being domiciled in the UK? Let's say we go back to our country of origin upon retirement, do we immediately stop being domiciled in the UK upon moving, does some time have to pass or is it once one registers with the local tax authority?

Thanks again for all the relies. This has been very enlightening.

Jeremy535897

It is a complex subject. Your domicile of origin is normally your father's domicile at the date of your birth. If you leave the UK permanently, you will either acquire a domicile of choice elsewhere, or your domicile of origin will revive. However, the deemed domicile rules will haunt you for five years after leaving because of the 15 years out of 20 rule.

chssvl

Thanks! Very useful. More of a reason to save up for an early retirement then! or keep hoping that the lottery ticket eventually comes up...

chssvl

Sorry for bumping this thread up but thought I'd rather post a follow up than a completely new thread. Specifically, I want to know if I now need to make any sort of declaration to HMRC.

As background, the succession/inheritance process is now complete and, as expected, I will come out as sole owner of my parents' flat in their home country - they had another house plus a couple of cars, which together were valued roughly the same as the flat (ca. £130k at today's exchange rate), so the way we split it with my mom is that I would take the flat and she takes everything else as there is no intention of selling or doing anything with the flat while she lives.

Furthermore, as discussed, no taxes are due on my inheritance in my home country as it falls below the threshold at which inheritance taxes are due (about £150k) and, while I will have to make a local self-assessment, no taxes will be due as I will not be charging my mom any rent (i.e. my income in my home country will be zero).

I was reading this article on the FT (https://www.ft.com/content/9f4dc0fb-a9a4-4ced-842b-54ffd00aecd7?emailId=0d8fa250-4cf1-4994-8ae4-096f4b964180&segmentId=22011ee7-896a-8c4c-22a0-7603348b7f22) and it got me thinking whether I needed to make any declaration to HMRC about this asset. I'm assuming that this is more for those who have lots of assets/income abroad, but just wanted to check. Thanks!

poseidon1

chssvl said:

Sorry for bumping this thread up but thought I'd rather post a follow up than a completely new thread. Specifically, I want to know if I now need to make any sort of declaration to HMRC.

As background, the succession/inheritance process is now complete and, as expected, I will come out as sole owner of my parents' flat in their home country - they had another house plus a couple of cars, which together were valued roughly the same as the flat (ca. £130k at today's exchange rate), so the way we split it with my mom is that I would take the flat and she takes everything else as there is no intention of selling or doing anything with the flat while she lives.

Furthermore, as discussed, no taxes are due on my inheritance in my home country as it falls below the threshold at which inheritance taxes are due (about £150k) and, while I will have to make a local self-assessment, no taxes will be due as I will not be charging my mom any rent (i.e. my income in my home country will be zero).

I was reading this article on the FT (https://www.ft.com/content/9f4dc0fb-a9a4-4ced-842b-54ffd00aecd7?emailId=0d8fa250-4cf1-4994-8ae4-096f4b964180&segmentId=22011ee7-896a-8c4c-22a0-7603348b7f22) and it got me thinking whether I needed to make any declaration to HMRC about this asset. I'm assuming that this is more for those who have lots of assets/income abroad, but just wanted to check. Thanks!

The FT article was primarily concerned with the 'big fish' non doms utilising offshore trusts and corporate entities to hide/disguise actual offshore income and taxable gains they should now be declaring and paying tax thereon.

 It is no coincidence that the likes of Bermuda, BVI and Cayman Islands were cited as sources in the article for the information exchange process which has now entrapped the non UK tax payers. These jurisdictions over the past 30- 40 years  were centers for the creation of tax avoidance trusts and companies on an industrial scale.

Your relatively tiny non income generating inherited  flat occupied by your mother rent free, does not fall to be declared to HMRC for any tax purpose. Until a taxable event does arise (eg sale of the flat, or taxable rents receivable)  you have nothing of relevance to declare or report at the present time.