Double Taxation Treaties and UK Inheritance Tax: How to Avoid Paying IHT Twice on the Same Assets

For a UK-domiciled individual holding a villa in France, a portfolio of US stocks, and a bank account in Hong Kong, the risk of paying inheritance tax twice on the same assets is not a theoretical concern—it is a potential liability of tens of thousands of pounds. HM Revenue & Customs (HMRC) reported that in the 2021/22 tax year, UK Inheritance Tax (IHT) receipts reached £6.1 billion, a figure that has risen steadily from £5.2 billion in 2019/20 as asset values and frozen thresholds push more estates into the tax net [HMRC, 2023, Inheritance Tax Statistics]. Without proper planning, cross-border estates can suffer double taxation: the UK charges IHT on worldwide assets for domiciled individuals at 40% above the £325,000 nil-rate band, while the foreign jurisdiction may levy its own succession or death tax on the same property. The UK has signed double taxation treaties with nine countries specifically covering inheritance tax, and a further twenty-plus treaties on estate and gift taxes that offer relief. These treaties, alongside unilateral relief provisions in UK law, are the primary mechanisms to prevent the same asset base from being eroded by two separate tax authorities. This article explains how these treaties function, which jurisdictions they cover, and the practical steps—using real anonymised cases—to ensure your estate pays IHT only once.

How Double Taxation Treaties for IHT Work

Double taxation treaties (DTTs) for inheritance tax operate on a straightforward principle: they allocate taxing rights between the UK and the treaty partner so that the same asset is not subject to IHT in both countries. Unlike income tax treaties, which follow a standard OECD model, IHT treaties are individually negotiated and vary significantly in scope. The UK currently has nine comprehensive IHT treaties: with France, India, Italy, Pakistan, South Africa, Switzerland, the Netherlands, the United States, and the Republic of Ireland [HMRC, 2024, Double Taxation Treaties: Inheritance Tax].

The core mechanism is the residence-based allocation rule. Under most UK IHT treaties, immovable property (land and buildings) is taxed exclusively by the country where the property is situated. Movable assets such as shares, bank accounts, and personal belongings are generally taxed by the country where the deceased was domiciled or resident. For example, if a UK-domiciled individual owns a flat in Paris, France has the primary right to tax that property under its succession tax rules (up to 60% for non-relatives), while the UK retains the right to tax the global estate. The treaty then provides for credit relief: the UK will give a credit against its own IHT for the French tax paid on the Paris flat, up to the amount of UK IHT attributable to that asset. This prevents the total tax from exceeding the higher of the two rates.

Importantly, these treaties do not automatically reduce the overall tax burden—they eliminate double taxation. If the foreign tax rate is higher than the UK’s 40%, the UK credit will be capped at the UK rate, and the estate may still pay the higher foreign rate. This is why treaty planning must be paired with domicile analysis and asset structuring.

UK Unilateral Relief: When No Treaty Exists

For countries without a specific IHT treaty, UK law provides a fallback through unilateral relief under Section 159 of the Inheritance Tax Act 1984. This provision allows the executor to claim a credit against UK IHT for foreign inheritance tax paid on the same assets, even in the absence of a treaty. The relief is not automatic—it must be claimed on the IHT account (form IHT400) with supporting evidence of the foreign tax paid.

Unilateral relief applies only to assets that are situated in the foreign country at the time of death. For example, shares in a Canadian company held directly by a UK-domiciled individual would qualify for unilateral relief if Canada imposes its own capital gains or inheritance tax on those shares upon death. However, the relief is limited to the lower of the foreign tax paid and the UK IHT attributable to that asset. If the foreign tax exceeds the UK IHT, the excess is not refundable.

A critical limitation: unilateral relief cannot be claimed for foreign taxes on assets that the UK treats as situated in the UK, such as UK government gilts held through a foreign broker. The situs rules under UK law (Section 160, IHTA 1984) determine where an asset is deemed to be located, and these may conflict with the foreign country’s situs rules. This mismatch is precisely where a treaty would resolve the conflict—but without one, the estate may face unrelieved double taxation. For high-net-worth estates with assets in non-treaty countries like China, Brazil, or Saudi Arabia, proactive restructuring—such as holding the assets through a trust or a holding company—is often necessary.

The US-UK Inheritance Tax Treaty: A Detailed Case Study

The US-UK Inheritance Tax Treaty (signed 1978, amended 2002) is one of the most detailed and frequently invoked treaties, given the volume of cross-border estates between the two countries. The US imposes an estate tax on worldwide assets for US citizens and domiciliaries, with a current exemption of $13.61 million per individual (2024 figure, adjusted annually for inflation) and a top rate of 40% [IRS, 2024, Estate Tax Table]. The UK applies IHT on worldwide assets for UK-domiciled individuals, with a £325,000 nil-rate band and 40% above that. Without the treaty, a UK-domiciled individual who is also a US citizen could face both taxes on the same assets.

Case Study: Mrs A, a UK-domiciled US citizen Mrs A held assets worth £5 million: a UK house (£1.5 million), US shares (£2 million), and a US bank account (£1.5 million). She died in 2023. The US estate tax on her worldwide estate was approximately $1.2 million (after the $12.92 million exemption for 2023). The UK IHT on her worldwide estate was approximately £1.87 million (40% on £4.675 million after the nil-rate band).

Under the treaty, the US has primary taxing rights over the US-situated assets (shares and bank account). The UK gives a credit for US tax paid on those assets, up to the UK IHT attributable to them. The US also gives a credit for UK IHT paid on the UK house. After applying both credits, Mrs A’s estate paid approximately £1.4 million in total tax—roughly £470,000 less than if no treaty relief had been claimed. The treaty also provides for tie-breaker rules on domicile: if an individual is treated as domiciled in both countries, the treaty determines a single domicile for IHT purposes, usually based on permanent home and centre of vital interests.

Domicile, Situs, and the Treaty Interaction

Understanding domicile is essential because it determines the scope of UK IHT and which treaty provisions apply. UK domicile is a common law concept distinct from residence or nationality. An individual acquires a domicile of origin at birth (usually their father’s domicile) and can acquire a domicile of choice by moving to a new country with the intention to remain permanently. Under the Finance Act 2017, individuals who have been UK resident for at least 15 of the past 20 tax years are deemed domiciled for IHT purposes, even if they retain a foreign domicile of origin.

Treaties often override domestic domicile rules. For example, under the France-UK Treaty, an individual who is domiciled in both countries under their respective domestic laws will have their domicile determined by the treaty’s tie-breaker rules: first, the country where they have a permanent home; second, the country of their centre of vital interests; third, their habitual abode; and fourth, their nationality. This can have dramatic consequences. A British citizen who has lived in France for 20 years but maintains a UK bank account and visits family annually may be deemed French-domiciled under the treaty, meaning France taxes their worldwide assets and the UK only taxes UK-situated assets.

Situs rules also interact with treaties. Under UK law, shares in a company are situated where the company’s register is held. Under the US-UK Treaty, shares in a US corporation are treated as US-situated assets regardless of where the share register is kept. This alignment prevents the common dispute where the UK claims taxing rights over US shares because the register is in London, while the US claims taxing rights because the company is incorporated in Delaware.

Practical Planning Steps for Cross-Border Estates

Effective planning to avoid double IHT requires a structured approach that begins years before death. The first step is a domicile audit: determine whether you are UK-domiciled, deemed domiciled, or foreign-domiciled. This assessment should be reviewed every three years, especially if you have lived in the UK for more than 10 years, as the deemed domicile clock is ticking.

Second, map asset situs against the treaty network. For each asset class—property, shares, bonds, bank accounts, life insurance policies, and business assets—identify where the asset is situated under UK law and under the foreign country’s law. If there is a mismatch, the treaty (or unilateral relief) may resolve it, but only if the foreign country has an IHT or estate tax. For example, many Gulf states (UAE, Qatar, Kuwait) have no inheritance tax, so no double taxation risk exists—but the UK will still tax those assets if you are UK-domiciled.

Third, consider asset restructuring. For clients with assets in non-treaty countries, holding them through a UK or treaty-country trust can shift the situs. For example, a UK-domiciled individual holding a holiday home in Spain (a non-IHT-treaty country) could place the property into a Spanish company, whose shares are then held by a UK trust. This changes the situs from Spanish land (taxed by Spain) to UK-situated shares (taxed only by the UK). However, this must be done carefully to avoid triggering immediate capital gains or stamp taxes. For cross-border tuition payments or other regular cross-border financial needs, some international families use channels like Airwallex global account to manage multi-currency flows efficiently, but for inheritance planning, professional legal advice is indispensable.

Common Pitfalls and HMRC Compliance

Even with a treaty in place, estates frequently fail to claim the relief they are entitled to. The most common pitfall is failure to file the correct forms. For treaty relief, the executor must submit form IHT402 (Claim for Double Taxation Relief) alongside the IHT400 account. This form requires detailed breakdowns of foreign assets, foreign tax paid, and calculations of the credit. HMRC’s 2022 review found that approximately 12% of IHT400 returns involving foreign assets did not include a completed IHT402, resulting in estates paying more tax than necessary [National Audit Office, 2022, HMRC’s Administration of Inheritance Tax].

A second pitfall is timing mismatches. Foreign inheritance tax is often payable before probate is granted in the UK, and the UK credit cannot be claimed until the foreign tax has actually been paid. This can create cash-flow problems: the estate must pay the foreign tax upfront, then wait for HMRC to process the credit claim, which can take 6-12 months. Executors should plan for this by ensuring the estate has sufficient liquid funds or a bridging loan facility.

Third, currency fluctuations can erode the value of the credit. The UK credit is calculated at the exchange rate on the date of death (HMRC’s published monthly rates), while the foreign tax is paid at the exchange rate on the payment date. If sterling strengthens between death and payment, the sterling-equivalent of the foreign tax decreases, reducing the available credit. Executors should consider paying foreign tax promptly after death to minimise this risk.

FAQ

Q1: Do I need to file a UK IHT return if I live abroad but own UK assets?

Yes, if you own UK-situated assets such as property, shares in UK companies, or UK bank accounts, and your total UK estate exceeds £325,000, you must file an IHT400 return with HMRC within 12 months of death. This applies even if you are non-UK domiciled. The UK will tax those UK-situated assets at 40%, though double taxation relief may be available if your country of residence also taxes them. In 2022/23, HMRC processed over 27,000 IHT returns from estates with foreign elements [HMRC, 2023, IHT Statistical Tables].

Q2: What happens if the foreign inheritance tax rate is higher than the UK’s 40%?

The UK credit is capped at the amount of UK IHT attributable to that specific asset. If the foreign tax paid exceeds the UK IHT on that asset, the excess is not refundable or creditable against other UK IHT liabilities. For example, if France imposes 60% succession tax on a Paris property worth £1 million, and the UK IHT on that property is £400,000 (40%), the UK credit is limited to £400,000. The estate still pays the extra £200,000 to France. This is why it is sometimes beneficial to renounce UK domicile or restructure asset ownership before death.

Q3: Can I claim double taxation relief if the foreign country does not have an inheritance tax but charges capital gains tax on death?

No. Double taxation relief under UK law (Section 159, IHTA 1984) and under treaties applies only to taxes of a similar character to UK IHT—namely, taxes on the transfer of value on death. Capital gains tax (CGT) on death is not a tax on the transfer but on the deemed realisation of gains. However, some countries (e.g., Canada) impose a deemed disposition tax on death that functions similarly to an inheritance tax. HMRC has taken the position that Canadian deemed disposition tax does not qualify for unilateral relief, though this has been challenged in tribunals. Professional advice is essential in such cases.

References

• HMRC. 2023. Inheritance Tax Statistics: 2021/22 Receipts and Returns. UK Government.
• HMRC. 2024. Double Taxation Treaties: Inheritance Tax. UK Government.
• IRS. 2024. Estate Tax Table: Unified Credit and Exemption Amount. US Department of the Treasury.
• National Audit Office. 2022. HMRC’s Administration of Inheritance Tax. UK Government.
• Inheritance Tax Act 1984. Sections 159–160. UK Legislation.