An article published in the Daily Telegraph considers the issue of double taxation relief, looking at what it does and whether investors may be entitled to it. 
Britain has a number of taxation treaties with other nations that protect you from being taxed twice on your income and assets. This may affect you if you work or own property or other assets abroad, or if you are domiciled in another country. These are known as double taxation treaties and they apply to a number of taxes – including inheritance tax.
What is double taxation relief for IHT?
If a foreign country charges IHT on the same assets that the UK taxes, you may be able to mitigate or reclaim the tax through the treaty.
Broadly speaking, whichever country you are domiciled in for tax purposes when you die has the right to tax all of your assets, regardless of where they are held. This includes foreign property and shares, for example. The other country in the treaty can only tax certain types of assets held in its territory. If there is still a double up, detailed rules determine which country gives credit for the other’s tax.
HMRC gives the following example:
Brian died on May 6, 2014, leaving an estate of £500,000. His estate included an apartment abroad valued at £35,000, on which local tax of £1,500 was paid.
- Estate = £500,000
- Less UK IHT threshold – £325,000
- Total = £175,000
- Inheritance tax due (40%) = £70,000
To calculate the proportion of IHT that is attributable to the foreign apartment, use the formula: value of asset / total value of the estate x IHT = 35,000 / 500,000 x 70,000 = £4,900 IHT on the property.
The foreign tax actually paid was £1,500, so the relief is limited to the £1,500 actually paid.
Do I qualify for double taxation?
The UK has double taxation treaties that apply to IHT with:
- Republic of Ireland
- South Africa
- USA
- Netherlands
- Sweden
- Switzerland
- France
- Italy
- India
- Pakistan
There are some slight variations among the treaties above, so it is worth thoroughly researching how your estate will be taxed after your death if you have assets in one or more foreign country.
What if there is no double taxation agreement?
You may still qualify for credit through what is known as unilateral relief. If you own an asset abroad that incurs IHT or a similar tax in that country, HMRC may give credit against your UK IHT bill.
Similarly, if the UK and another country charge tax on an asset in a third country, or an asset that is deemed to fall under tax laws in both countries, a credit may be applied. This is a proportionate credit calculated with the formula: A/(A+B)xC. Here A is the inheritance tax, B is the overseas tax and C is whichever of A or B is smaller.
HMRC gives the following examples:
Ann is domiciled in Ruritania, but is also treated as domiciled in the UK. She makes a gift of property sited in Utopia.
Example one of Unilateral Relief calculations
| Item | Amount |
| UK inheritance tax (A) | £3,000 |
| Ruritanian inheritance tax (B) | £1,000 |
| C is the smaller of A and B | £1,000 |
| Credit against UK inheritance tax is £3,000 / (£3,000 + £1,000) x £1,000 | £750 |
| Net UK tax | £2,250 |
- Tom is domiciled in Utopia but holds shares in a Ruritanian company, which maintains a duplicate share register in the UK. Under UK law they regard the shares as sited in the UK, but Ruritanian law regards them as sited in Ruritania. Tom dies (but his estate is not liable to Utopian tax).
Example two of Unilateral Relief calculations
| Item | Amount |
| UK Inheritance Tax (A) | £1,000 |
| Ruritanian Inheritance Tax (B) | £4,000 |
| C is the smaller of A and B | £1,000 |
| Credit against UK Inheritance Tax is £1,000 / (£1,000 + £4,000) x £1,000 |
£200 |
| Net UK tax | £800 |
In cases where a double taxation treaty exists but unilateral relief would be greater, the higher amount is applied.
Consider expert advice
As you’ve probably gathered (or are already well aware), tax law is complicated, particularly when two or more countries are involved. It can be difficult to determine where you are domiciled for tax purposes and how various treaties apply to you. Getting expert advice could help avoid costly errors and potentially save you thousands of pounds.
The levels and bases of taxation and reliefs from taxation can change at any time. Tax relief depends on individual circumstances.
This information is provided strictly for general consideration only. No action must be taken or refrained from based on its contents alone. Accordingly, no responsibility can be assumed for any loss occasioned in connection with the content hereof and any such action or inaction. Professional advice is necessary for every case. Based upon our understanding of UK tax law at March 2019. The value of investments can fall as well as rise and you may not get back the full value of your investment
Julian Kaye Dip PFS
Financial Planner