How does the UK tax estates of foreign residents?
The residence and domicile status of the deceased is important for estate administration. The deceased’s tax status will affect what taxes the executors are liable to pay.
Capital gains tax
Section 62 of the Taxation of Chargeable Gains Act 1992 explains that the personal representatives are treated as having the same residence and domicile status as the deceased did at the time of death.
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So if the deceased was not UK resident when he died, then the personal representatives will generally be outside the scope of UK capital gains tax (‘CGT’) when selling estate assets, including assets that are located in the UK. This is the case even if the personal representatives are themselves UK resident, so are liable to CGT on their personal gains.
There is a similar rule in section 834 of the Income Tax Act 2007, but here the actual residence of the personal representatives is also important. If all the personal representatives are non-resident, they are not liable to UK income tax (other than potentially on UK source income).
If the personal representatives have ‘mixed residence’ (that is; some of them are UK resident and some are not) then the next question is whether the deceased was UK resident, ordinarily resident or domiciled when he died. If he was, then the personal representatives are treated as if they are all UK resident, which means they are within the scope of UK income tax even on foreign income.
On the other hand, if the deceased was not UK resident, ordinarily resident or domiciled when he died, then the personal representatives are treated as if they were all non-resident for income tax purposes. Whilst they may still be liable to tax on UK source income, they will not have any UK tax to pay on foreign source income.
Lifetime tax debts
There may be further tax issues to consider. Even if the deceased was non-domiciled under general principles, he may not have been entitled to pay income tax or CGT on the remittance basis in the UK. The deceased may have been obliged to pay the Remittance Basis Charge (currently £30,000 per year, going up to £50,000 per annum from 6/4/12 after 12 years of UK residence) in order to avoid UK tax on offshore income and gains.
This could mean that if there are offshore assets in the estate, HMRC will still expect payment of unpaid tax, interest and penalties on the undisclosed offshore assets (all of which will be additional debts of the estate).
Perhaps the tax most easily overlooked is inheritance tax (‘IHT’). The court cases show that someone can live many years in the UK without becoming UK domiciled. Equally, however, that works against the ex-pat community, who may spend years living overseas without ever losing their original UK domiciles.
Where the deceased died with a UK domicile, this will mean that UK inheritance tax will be due on the worldwide estate, even if the deceased died whilst resident in another country. That may well mean there are also foreign estate taxes to consider.
However, there is an additional rule for domicile where IHT is concerned. Domicile for IHT purposes can be different to the general concept of domicile. Section 267 of the Inheritance Tax Act 1984 provides that a person is ‘deemed’ domiciled in the UK, for IHT purposes only, either:
- If he has been resident here for 17 out of 20 tax years; or
- For the following 3 years after losing an English domicile.
This notion of deemed domicile has no effect on succession or other non-tax issues, or indeed on income tax or capital gains tax.
Estate administrators will need to know the tax status of the deceased, in order to work out what UK taxes the executors will need to pay. The executors’ tax liabilities, as executors, may be different to the tax they have to pay personally.
Clearly these notes are intended as guidance only and should not replace proper legal advice, either in England or in any overseas jurisdiction.
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