UK Inheritance Tax on Overseas Assets: Reduce Your Liability

Dealing with inheritance tax (IHT) can be challenging enough; it’s an extremely complex area of UK taxation.

And if you have assets spread across multiple countries, the complexity increases. When it comes to inheritance tax in the UK, the rules for overseas property might not be as straightforward as you think. Understanding inheritance tax on foreign property is crucial for estate planning, especially if you have assets in multiple countries.

What is UK Inheritance Tax?

The UK charges inheritance tax on a person’s estate after they pass away, including property, money, and other assets. The tax applies if the estate exceeds a certain threshold, known as the "nil-rate band" (currently £325,000 and stuck there since 2009!). Amounts above this threshold may face a 40% tax, with exemptions for gifts, spousal transfers, and charity donations. There are also certain tax planning strategies, structures and solutions we advise and implement for our clients.

For a full breakdown of UK inheritance tax rates, exemptions, and thresholds, visit the official HMRC guidance on IHT.

Does Inheritance Tax Apply to Overseas Property?

Yes, if you are a long-term UK resident. Since 6 April 2025, UK inheritance tax applies to your worldwide assets, including property abroad, if you have been UK resident in at least 10 of the previous 20 tax years. After you leave the UK, this continues for 3 to 10 years, depending on how long you were resident.

For example, if you own property in Australia and you are a long-term UK resident, the UK will include its value in your estate, even though it is outside the UK. The key factor is now your UK residence history, not your domicile.

Different countries set their own inheritance tax rules, which affect how they tax foreign property. The OECD Tax Database offers a comparison of inheritance tax policies worldwide.

After you leave the UK, this continues for 3 to 10 years, depending on how long you were resident.

Long-Term Residence and Inheritance Tax: Why It Matters

Your residence history now decides how IHT applies to your estate. Long-term UK residents are liable for inheritance tax on all of their worldwide assets, including foreign properties. If you are not a long-term UK resident, only your UK assets are within UK inheritance tax, and that includes UK homes held through overseas companies or trusts.

If you are unsure whether you are a long-term UK resident, seek expert advice, as it affects estate planning and foreign asset distribution.

This residence-based test replaced domicile from 6 April 2025, and it brings more internationally mobile individuals and families into UK inheritance tax. Domicile now matters only in a few cases, such as some older inheritance tax treaties.

How Forced Heirship Rules Can Affect UK Inheritance Tax

When you own property abroad, you must consider forced heirship. In certain countries, this concept requires you to allocate a portion of your estate to your children, regardless of your will's instructions. Countries like Spain, Italy, and other civil law jurisdictions follow forced heirship laws.

If you're a long-term UK resident and leave a Spanish holiday home to your spouse, Spanish law may still require giving part to your children. Gifts to a spouse are usually exempt from inheritance tax (IHT), but the exemption is capped at £325,000 where you are a long-term UK resident and your spouse is not (unless your spouse elects to be treated as UK resident for IHT). Forced heirship could also trigger IHT on your children's portion.

However, there is a way to manage this. If you own property in a country with forced heirship rules, you may be able to specify in your will that you want your assets to be administered according to UK inheritance law, rather than the foreign country’s forced heirship laws. You must elect under the foreign jurisdiction's laws, if allowed, to apply UK inheritance rules. This could help avoid complications and potential conflicts between the foreign laws and your personal intentions.

Case Study

This case study describes planning under the rules before 6 April 2025. Since then, a trust set up by someone who is, or becomes, a long-term UK resident no longer keeps foreign assets outside UK inheritance tax, so the same result is not available for new trusts. Existing structures should be reviewed under the new rules.

Our client, a UK tax resident, owned a portfolio of properties in both the UK and Australia. Concerned about UK inheritance tax on overseas assets, they sought our expertise to structure their estate efficiently and stay tax-compliant. Under standard rules, worldwide assets are subject to 40% IHT, meaning their Australian properties could face a significant tax liability upon their passing, in excess of £1m just on the overseas properties.

We undertook a detailed domicile review and explored tax-efficient structures to mitigate UK IHT exposure on the Australian properties. By utilising an offshore trust structure and restructuring ownership, we successfully ring-fenced the non-UK assets from the UK IHT net while ensuring the client retained control over their investments. Additionally, under the rules then in force, we advised on the use of excluded property status to keep the offshore assets outside the UK estate for IHT purposes.

As a result, our client significantly reduced their UK inheritance tax liability while maintaining a compliant and flexible ownership structure. This not only safeguarded their overseas investments for future generations but also provided peace of mind that their estate planning was fully optimised and tax-efficient. If you have international assets and want to ensure they are structured tax-efficiently, our team at ASWATAX is always here to help.

What Can You Do to Plan Ahead?

The key to managing inheritance tax on overseas property is effective planning. With foreign properties, the rules can vary greatly, so it’s crucial to:

1. Consult a tax professional: Estate planning across multiple jurisdictions can be tricky, so getting advice specific to your situation is essential. We are connected worldwide.
2. Consider multiple wills: Separate wills for UK and foreign assets can speed up the process but must be coordinated to prevent conflicts. Creating separate wills for UK and foreign assets can simplify estate administration. The UK Law Society provides guidance on making legally sound wills.
3. Understand forced heirship laws: If you own property in a country with these rules, determine how they affect your UK IHT obligations and whether you can make any elections.
4. Residence planning: If you’re unsure whether you are, or will become, a long-term UK resident, and how that affects your estate, it’s worth discussing with us. Making the right choices following our advice can protect you from complicated tax issues later.

Planning ahead is crucial to managing inheritance tax on overseas assets efficiently. To help you navigate IHT and asset management, we’ve created a comprehensive free guide packed with expert insights. Download it now and take control of your estate planning!

Conclusion

Inheritance tax on overseas property adds another layer of complexity to estate and tax planning. Planning ahead or handling a loved one's estate? Understanding UK IHT on foreign assets is crucial.

Plan ahead (sooner is always better) by assessing your UK residence history and international inheritance laws like forced heirship. This way, you can pass on your assets according to your wishes and minimize the tax burden on your heirs.

If you own overseas property, seeking early professional advice can save your family from future tax and legal complications.

Need expert guidance on inheritance tax for foreign property? The ASWATAX team is here to help. Contact us today to speak with our specialists!