Of all the taxes to consider when buying abroad, inheritance tax is one of the most fiendishly complex and can be surprisingly costly, discovers Peter Swain
After much research, and a good deal of humming and hawing, my wife and I have just bought a house on the Caribbean island of Nevis. Now, when a property writer, i.e. me, buys a house abroad, you might think they'd know all the answers when it comes to tax. Well, I didn't, but, after talking to a host of independent lawyers, I now know the questions to ask. Most of us consider stamp duty, income tax and capital gains tax, but the one you should add to the list, and that potentially packs the nastiest punch of all, is inheritance tax (IHT).
In many foreign jurisdictions, for example, there is no spouse exemption for inheritance tax, which means that a surviving partner can end up paying crippling death duties. "Get IHT wrong, and your beneficiaries could pay a small fortune. It all starts with the ownership structure on the title deeds," says Richard Way, the editor at OverseasGuidesCompany.com, a good first point of reference on the subject. "Good foreign lawyers will often OK the property side of the deal, but will suggest redrafting the contract itself to mitigate future tax exposure," he suggests.
Dan Harris of Stone King (stoneking.co.uk), experts in international probate and succession, concurs. "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," he says. "Even within countries as diverse as Spain, the USA and Lebanon, each region, or indeed religion, has different rules on who can inherit property and how much tax is paid.
"Broadly speaking, succession law - or who gets what when you pass away - and the taxation law in respect of buildings and land is governed by the jurisdiction of the country in which they are situated. Lawyers call these immovable assets." Don't ignore domicile Mr Harris says everything else - what we call moveable assets, such as stocks and shares - is governed by your nationality, your religion or your domicile.
"The definition of domicile differs between jurisdictions, and there are different types: domicile of origin (where you were born); domicile of choice (where you choose to live and intend to die); deemed domicile (where you have lived 17 of the past 20 years); and domicile of dependency (when young or mentally impaired your parents' domicile prevails)." Most foreign jurisdictions do not provide their citizens with the same freedom as they enjoy in the UK to make a will and give their assets to whomever they wish.
"Instead, countries like France operate a system of forced heirship, which means assets are divided up between the deceased's parents, siblings and, if they're lucky, their surviving partner. These rules take precedence over a will, although some countries allow a portion of the deceased's assets to pass in line with their written wishes. So you must have a properly drafted will that takes into account different legal jurisdictions, or even have a will for each country where you hold assets."
Also, remember that if you have foreign assets such as stocks and shares in, say, France, these may also be subject to UK inheritance tax if you are UK-domiciled. Unless properly advised, you could end up paying tax in both countries. If you do decide to move away from the UK, you can adopt what's called a domicile of choice. However, your domicile is not easily changed, and you have to convince the taxman that there is sufficient evidence for that. We have also considered the taxman's take on our own case down the line.
Our local Nevisian lawyer, the splendidly efficient Maurisha Robinson of Daniel, Brantley & Associates, told us that the country of St Kitts and Nevis has no IHT at all, which made life simpler. But local transfer taxes mean that, if my wife and I intend one day to pass the property on to our two children, it makes sense to put them on the title deeds as well. 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.
There are general rules governing IHT in Spain, with each region having its own variations. The subject is also a political football, so the regulations are constantly changing. All in all, local legal advice is an absolute must. Alex Radford, an English solicitor and abogado of Cremades & Calvo-Sotelo (en.cremadescalvosotelo.com) sets out some of the basics for non-Spanish residents, who spend fewer than 183 days in year in the country.
"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." So, the first rule of buying a property in Spain: make a Spanish will. "If an unmarried friend or cousin inherited the same 50 per cent share of the property, their IHT liability is €44,206.08 (£36,272.77)."
For Spanish residents, the rules are different. "At the death of an owner of Spanish property, any transfer is subject to Spanish gift or inheritance tax. "The tax due would depend on the owner's relationship with the heir (blood-related or friend), the heir's pre-existing net wealth (if tax resident in Spain), the market value of the property and the tax residency of the heirs. The tax rate varies - according to value of the estate - from 7.65 per cent to a maximum of 34 per cent for values over €797,555.08 (£654,676.50)."
Some buyers have been encouraged to set up a UK or offshore company as a mechanism to limit IHT. It's a highly complex field, but, broadly speaking, when incorporation and admin fees are included, on modestly priced Spanish properties, they seldom save much. "And they often depend for their effectiveness on the beneficiaries not informing the Spanish tax authorities of changes in share ownership," according to Jonathan Eshkeri of E&G Solicitors in Spain (solicitorsinspain.com). "Which is, strictly speaking, unlawful."
My guidance on matters Gallic comes from Barbara Heslop, a solicitor (heslop-platt.co.uk), who presents sage advice at our A Place in the Sun show seminars. "Under French law, a surviving spouse pays no inheritance tax (droits de succession)." Then, broadly speaking, the closer the relation the less tax they pay. "Children each have a €100,000 (£82,125) tax-free allowance. Above that figure, a sliding scale comes in, up to a maximum of 45 per cent on the value of assets received above €1,805,677."
Between siblings, the allowance is only €15,932, above which IHT kicks in at 35 per cent. "Between unrelated persons, the tax-free allowance is only €1,594. Above that, the beneficiary pays IHT at 60 per cent," reports Ms Heslop. The vital issue is whether or not you are resident in France. If you are, your worldwide assets, minus property outside France, will be subject to French IHT and succession law. If you are still domiciled in the UK, only your French property is subject to French succession law and IHT. "However, 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 [whereby 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." It's complicated, and advice from a specialist is essential, suggests Ms Heslop.
Our one non-EU example does things very differently. My guide stateside is Renea Glendinning, who heads the international consulting and tax planning practice of Sarasota-based Kerkering, Barberio & Co (kbgrp.com). "Recent changes in US estate tax (IHT) laws provide substantial benefits to UK residents owning property in the US," Ms Glendinning says. "From January 1 2014, persons domiciled in the US, subject to US estate tax on the value of their worldwide assets; do not pay US estate tax unless the value of those worldwide assets exceeds $5.34 million (£3.21 million)."
For non-Britons not domiciled in the US, it's different. "Their beneficiaries' liability starts at $60,000, above which 26 per cent is payable, increasing to a maximum of 40 per cent on property valued at $1 million and above." This only applies to the US property itself, not worldwide assets. However, an exception is made for Britons. "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." (i.e., there's nothing to pay on estates worth less than $5.34 million).
However, she adds, "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." Ms Glendinning adds an important proviso: "I'd recommend consulting a UK tax adviser before making any final decisions." A good piece of advice for buyers in any country...
The Italians don't like paying tax, but, in the case of IHT, they are often well within their rights. On estates worth up to €1million going to a surviving spouse or children, no IHT is payable either by Italian residents or non-resident Britons with property in Italy. Even then, reports our expert in Padua, the lawyer Massimiliano De Benetti (debenettilaw.com), property is valued not by its market price but by its registry value, which might be considerably lower. Over €1 million, IHT is payable at 4 per cent by immediate family members.
Siblings have a €100,000 allowance each, after which IHT is payable at 6 per cent. "Sometimes, trusts drawn up in the UK can mitigate tax exposure on larger estates, but that is for a UK lawyer to decide." The use of foreign companies is not unknown, but the set-up and administration costs are high, says Mr De Benetti.
Inheritance tax has been abolished in Portugal since 2004, regarding assets in the country. However, the inheritance is subject to another tax, the stamp duty, payable at a rate of 10 per cent, according to advogado Ricardo Ferreira of Martínez-Echevarría, Pérez & Ferrero law offices in Vilamoura (martinezechevarria.com). "The stamp duty is only applicable to the assets based in Portugal," he says. "But the spouse/husband, descendants and ascendants don't need to pay the stamp duty."
Deaths should be reported to the tax department, at which point the heirs and assets are identified. Personal assets of the deceased are subject to tax exemptions. "To make the process easier for the heirs, it is advisable for the foreigners to do a will just for the Portuguese assets," suggests Mr Ferreira.