Receiving inheritance from abroad: What you need to know

If you’ve recently come into an inheritance, you know that it can be emotional and confusing. Although some of your financial problems might be solved now, these circumstances are usually overwhelming, especially when you have to make financial decisions right away.

But what happens when your inheritance comes from outside the UK? Is the procedure any different? We’ve created a brief guide on receiving an inheritance from abroad to help you through this stressful time.

We’ll also point out a cost-effective way to manage your finances across borders, including inheritance. The Wise account from the money services provider Wise allows you to send money to 160+ countries at the mid-market exchange rate with low, transparent fees*.

Learn more about the Wise account 💰

What is an inheritance from abroad?

Inheritance from abroad refers to assets inherited from outside of your home country, in this case the UK. It also includes inheritance from individuals who weren’t UK residents.

When coming into an overseas inheritance, it’s best to consult an expert in this field to assist you in handling the whole process. Since different rules apply in different countries, foreign and domestic inheritance usually won’t be treated the same.

For instance, you should consider hiring a solicitor and a tax advisor. You’ll certainly be dealing with legal aspects of inheritance and the laws of a foreign country, as well as with tax implications both at home and abroad.

What are the UK tax implications on an inheritance from abroad?

After receiving inheritance from abroad, it’s important to check what the UK inheritance tax rules are. Let’s cover what you should be aware of as a beneficiary.

UK inheritance tax on foreign assets

Whether you’ll pay tax on your overseas inheritance depends on a few factors.

The first one is whether the person leaving the inheritance has domicile status in the UK. If not, the UK assets are the only ones subject to Inheritance Tax, while foreign assets are usually excluded. It’s important to note that even if you live abroad, you’re considered domiciled in the UK if your permanent home is here and if you’ve lived in the UK for 15 of the last 20 years.¹

Also, the value of the inherited estate determines Inheritance Tax liability. If the total value is below £325,000, there’s usually no Inheritance Tax. On the other hand, everything above that threshold is taxed at 40% or at 36% if at least 10% is left to charity.

However, there’s an exception to the threshold rule when everything above £325,000 is left to the spouse or civil partner or if it’s donated to a charity or a community amateur sports club. In this case, even though the estate value is above the set limit, the assets are not subject to Inheritance Tax.

The taxes are usually paid using funds from the estate, not directly by the beneficiary.²

Double taxation treaties and reliefs³

Double taxation treaties between two countries prevent you from paying taxes twice on the same inheritance. If the UK and the country where your inheritance is located both charge Inheritance Tax, these bilateral tax conventions come into play. The UK has Inheritance Tax DTAs with the following countries:

• Republic of Ireland
• South Africa
• USA
• Netherlands
• Sweden
• Switzerland

The UK also has treaties with France, Italy, India and Pakistan, but different double taxation rules apply.

If there is no double taxation agreement between the UK and the inheritance location country, you still might be able to get relief through Unilateral Relief provision. What this means is that the HMRC gives credit against your Inheritance Tax based on the tax already paid to the other country. However, if the foreign tax is higher than the Inheritance Tax you would pay in the UK, the credit is limited to the amount of UK Inheritance Tax.

In case you get taxed on the same inheritance by another country, make sure you contact HMRC. The credit will then be a proportion of the tax. This is calculated by the formula A ÷ (A + B) x C, where:

• A is the UK Inheritance Tax
• B is the foreign tax
• C is whichever of A or B is smaller

How to report a foreign inheritance to HMRC⁴

If you’ve gathered the necessary information and determined that your foreign inheritance is subject to Inheritance Tax, the next step is contacting the HMRC.

You’ll need to send them form IHT400 within 12 months, starting from the end of the month of death. If the deceased was domiciled outside the UK, you’ll need to fill in Schedule IHT401. Missing the deadline without reasonable excuse can result in getting a penalty up to £200. Furthermore, if you don’t send the form 2 years after the death, you might get an additional penalty up to £3,000.

Before sending any of the forms, you’ll need an Inheritance Tax reference number, which you can apply for online or by sending form IHT422 by post. You need to apply for the reference number at least three weeks before sending any other forms, so make sure you plan accordingly.

Transferring an inheritance from abroad to the UK

Essentially, you have two options for transferring your foreign inheritance to the UK ─ you could do this using traditional banks or through money transfer services. When making your decision, there are multiple factors you should take into consideration.

For example, the money you inherit from overseas will likely be in a foreign currency. This means that your transfer might include converting the currency to GBP, which comes with exchange rate margins. It’s very important to look up the exchange rates different banks and transfer services use, since this can affect the final amount of money you receive.

Also, both the bank sending the money and the one receiving the money might have international transfer fees. And if the transfer involves correspondent banks, that will be an additional expense.

Finally, the speed of international transfers can vary. This depends on processing times, currency conversion and any intermediary banks, if they’re involved. Money transfer services generally have faster transfers.

A good option to consider when transferring your inheritance is the money services provider Wise. The Wise account auto-converts your money at the mid-market exchange rate with no added margin, so you won’t pay high conversion costs. You can use it for safe and quick large amount transfers with low, upfront fees*. In case you’d like to speak to someone about your transfer directly, you can request a call back and get all the help you need from the Wise expert team.

Important Forms and Paperwork

After you come into taxable foreign inheritance, you’ll need to send HMRC form IHT400 or Schedule IHT401, if the deceased was domiciled outside the UK.⁴ Besides this, HMRC might contact you in some cases and ask for additional Inheritance Tax.

For example, if you’ve received gifts from the deceased in the seven years before their passing, those might also be taxable. This depends on the value of the gifts and your relationship with the deceased.

If the deceased was your spouse or civil partner and if the gift value is under the £325,000 threshold, the gifts are exempt from Inheritance Tax. Also, gifts up to £3,000 a year don’t count. In all other cases, fill in Schedule IHT403 and send it to HMRC.⁵

If you’re unsure whether you’ve sent out all the necessary forms and reported everything, make sure you seek professional guidance.

Steps to take after receiving inheritance from abroad

It can be hard to determine where to start after receiving inheritance from abroad. Here’s a short overview of everything you need to do:

• Determine the value of the inheritance to know whether it’s taxable
• Complete Form IHT400 or Schedule IHT401 and send it to HMRC
• Look into DTAs or Unilateral Relief
• Choose how you’ll transfer the funds
• Manage your assets

Contacting a Tax advisor or Solicitor

Handling Inheritance Tax paperwork and figuring out how much you have to pay can be overwhelming. Not doing it right can also result in penalties and additional complications that make everything longer and more expensive.

That’s why consulting a professional right from the start, such as a solicitor or a tax advisor, is one of the best things you could do. They can inform you on any changes to the existing domestic and foreign laws and help you navigate the entire process.

Understanding your rights and obligations

Even after submitting all of the necessary forms to HMRC and consulting professionals, it’s your responsibility to continue complying with UK laws and international agreements. For example, checking whether you need to pay tax on profit from your inheritance is your obligation.

On the other hand, you have the right to fair treatment during the whole inheritance process. This includes the distribution of the inheritance and the amount of tax you might have to pay. If you believe you’ve been wronged, either here or internationally, make sure you seek legal advice.

Receiving an inheritance from abroad? Use Wise

After reading this guide, you should have an idea of what you can expect when receiving an inheritance from abroad. Although you likely won’t pay inheritance taxes in the UK, it’s best to consult a financial or legal advisor to make sure you’re up-to-date with the latest laws and regulations.

And for managing your foreign inheritance, you can rely on the Wise account from the money services provider Wise. It’s not a bank account, but it offers many similar features.

With Wise, you can securely send large amount transfers to 160+ countries for low, transparent fees*. You’re also guaranteed the mid-market exchange rate with no markup added. You can track your transfer at every step and get dedicated support from Wise’s team of experts if needed.

Please see the Terms of Use for your region or visit Wise fees & pricing for the most up-to-date information on pricing and fees.

Sources used:

Sources last checked on date: 16-Sep-2024