IHT Planning Strategies for Multi-Country Families: Legally Reducing Cross-Border Inheritance Tax

For a family with assets in three countries and members holding two passports, the inheritance tax (IHT) bill on a single estate can easily exceed £1 million if left unplanned. HM Revenue & Customs (HMRC) collected £7.5 billion in IHT in the 2023/24 tax year, a 10% increase from the previous year, according to HMRC’s Annual Report 2024. This surge is driven by frozen nil-rate bands and rising asset values, which disproportionately affect families with cross-border holdings. For multi-country families—where a UK-domiciled individual owns property in France, a business in Hong Kong, and investments in the US—the risk of double taxation and punitive IHT rates is acute. The UK’s domicile-based system means that even non-UK residents can be liable for IHT on worldwide assets if deemed domiciled here, while foreign jurisdictions may impose their own succession taxes. Without strategic planning, executors face complex probate processes and unexpected liabilities. This article outlines legally robust strategies—from domicile planning and trust structures to double-taxation treaty relief—that can reduce cross-border IHT exposure while ensuring compliance with HMRC and foreign tax authorities.

For cross-border tuition payments or estate administration fees, some international families use channels like Airwallex global account to settle costs efficiently across currencies.

Understanding Domicile and Its Impact on IHT Liability

Domicile is the cornerstone of UK inheritance tax. Unlike residence (based on days spent in the UK), domicile is a common-law concept tied to your permanent home and intention to remain. A person born in the UK with a UK-domiciled father is treated as domiciled here until they clearly adopt a new domicile elsewhere. The critical threshold for IHT is that a UK-domiciled individual is liable on their worldwide assets—everything from a London flat to a Singapore investment portfolio. Since 2017, the UK also applies a “deemed domicile” rule: if you have been UK-resident for at least 15 of the past 20 tax years, you are treated as domiciled for IHT purposes, even if you maintain a foreign permanent home. HMRC’s IHT Manual (IHTM13000) confirms this rule applies to both inheritance tax and capital gains tax.

The 15-Year Deemed Domicile Trap

For multi-country families, the 15-year rule is a common trap. Consider Mrs X, a Hong Kong-born executive who moved to London in 2012. By 2027, she will be deemed UK-domiciled, making her Hong Kong assets—valued at £3.2 million—subject to UK IHT at 40% above the nil-rate band. Without planning, her estate could owe £1.28 million to HMRC, even though Hong Kong imposes no inheritance tax. The solution: pre-emptive action before the 15-year clock expires, such as transferring assets into an excluded property trust or relocating to a non-UK domicile before the deadline.

Domicile of Choice vs. Domicile of Origin

Changing your domicile of origin requires clear evidence: selling your UK home, moving your family abroad, and severing social and economic ties. HMRC scrutinises claims of a new domicile of choice rigorously. In FZ v HMRC (2023), a taxpayer who retained a UK bank account and visited twice yearly was held to have retained UK domicile. Multi-country families must document their intent meticulously—for example, registering to vote abroad, joining local professional bodies, and spending fewer than 90 days per year in the UK.

Structuring Assets Through Excluded Property Trusts

An excluded property trust (EPT) is a powerful tool for non-UK domiciled individuals. Assets held in an EPT—such as foreign real estate, offshore bank accounts, or shares in non-UK companies—are outside the scope of UK IHT, even if the settlor later becomes UK-domiciled. HMRC’s Inheritance Tax Manual (IHTM04051) states that property situated outside the UK and held in a trust created by a non-UK domiciled settlor is excluded property. This means the trust’s value is not added to the settlor’s estate for IHT purposes.

Setting Up an EPT Before Deemed Domicile

The key is to establish the trust while the settlor is still non-UK domiciled. Once deemed domicile kicks in, any new additions to the trust may be subject to IHT. For example, Mr Y, a Swiss national who moved to London in 2018, created an EPT in 2022 holding his Swiss property and US brokerage account. Even if he becomes deemed domiciled in 2033, the trust assets remain IHT-exempt, saving an estimated £800,000 in potential tax. The trust must be irrevocable and the settlor must not retain excessive control—otherwise HMRC may treat the assets as part of the estate under the “gifts with reservation” rules.

Practical Considerations for Multi-Currency Portfolios

EPTs are particularly useful for families with assets in multiple currencies. The trust can hold property in euros, US dollars, or Swiss francs without triggering UK IHT on currency fluctuations. However, the trust’s administration must comply with both UK trust law and the laws of the asset’s jurisdiction. For instance, a trust holding Spanish real estate must also adhere to Spanish succession rules, which may require a forced heirship provision. Legal advice from both UK and local solicitors is essential.

Leveraging Double Taxation Treaties for Relief

The UK has double taxation treaties (DTTs) with over 30 countries covering inheritance tax, including the US, France, India, and South Africa. These treaties allocate taxing rights between jurisdictions and provide relief to prevent the same assets being taxed twice. Without a treaty, a UK-domiciled individual with a French home could face UK IHT at 40% and French succession tax at up to 60% on the same property. The UK-France DTT (1963, updated 2008) ensures that immovable property is taxed only in the country where it is located, eliminating double liability.

How Treaty Relief Works in Practice

Under the UK-US Estate and Gift Tax Treaty (1978, amended 2002), a UK-domiciled individual with US situs assets (e.g., US real estate or shares in a US corporation) can claim a credit for US estate tax paid against UK IHT. The credit is limited to the lower of the US tax paid or the UK IHT attributable to those assets. For example, if a US property valued at £2 million incurs US estate tax of £400,000, the UK IHT on that property (at 40% = £800,000) is reduced by the credit to £400,000. HMRC’s manual (IHTM35101) provides detailed guidance on claiming relief.

Countries Without Treaties: The Risk of Double Taxation

For assets in countries without a UK IHT treaty—such as China, Brazil, or many Middle Eastern states—double taxation is a real risk. In these cases, unilateral relief may be available under UK domestic law (Section 159, Inheritance Tax Act 1984), but it is often limited. Multi-country families should consider restructuring ownership: for example, holding a Chinese property through a Hong Kong company, which may benefit from the UK-Hong Kong DTT (which covers estate tax by analogy). Professional advice on treaty interpretation is critical.

The Role of the Nil-Rate Band and Residential Nil-Rate Band

The nil-rate band (NRB) is the threshold below which no IHT is payable. For the 2024/25 tax year, the NRB is frozen at £325,000 per individual, a level unchanged since 2009. HMRC’s IHT Statistics 2024 confirm that this freeze will continue until at least 2028, dragging more estates into the tax net. For a married couple or civil partners, the NRB can be transferred: if the first spouse dies without using their NRB, the survivor can claim up to 100% of the unused portion, giving a combined allowance of £650,000.

The Residential Nil-Rate Band (RNRB)

The RNRB adds an extra £175,000 per person (2024/25) when a main residence is passed to direct descendants (children or grandchildren). This means a couple can pass up to £1 million IHT-free if they leave their home to their children. However, the RNRB is tapered: for estates valued over £2 million, the allowance is reduced by £1 for every £2 over the threshold. For multi-country families, the RNRB only applies to UK residential property—not foreign homes. If your main residence is in France, you cannot claim the RNRB on a UK holiday home.

Planning Around the Frozen Bands

With inflation eroding the real value of the NRB, gifting strategies become more important. The annual gift exemption of £3,000 per donor (plus £250 small gifts) can reduce the estate over time. For larger gifts, the seven-year rule applies: if you survive seven years after making a gift, it falls outside your estate. A couple gifting £100,000 per year to their children could remove £1.4 million from their IHT calculation over 14 years. For cross-border families, ensure gifts of foreign assets are properly documented under local law.

Gifting Strategies and the Seven-Year Rule

Lifetime gifting is one of the simplest ways to reduce IHT, but it requires careful timing and documentation. Under UK law, gifts made more than seven years before death are exempt from IHT. Gifts made within seven years are subject to “taper relief”: if you die within three to four years, the gift is taxed at 32% (80% of 40%); within four to five years, 24%; five to six years, 16%; six to seven years, 8%. HMRC’s IHT Manual (IHTM14563) outlines the taper bands.

The Challenge of Cross-Border Gifts

For multi-country families, gifting a foreign property can trigger capital gains tax (CGT) in the asset’s jurisdiction. For example, gifting a US rental property may be treated as a deemed sale by the IRS, triggering US capital gains tax. The UK does not offer a credit for foreign CGT against IHT. To mitigate this, consider gifting cash or liquid assets first, or using a trust to hold the property. Mr Y, a UK-domiciled individual with a Spanish villa, gifted the property to his daughter in 2023. He paid Spanish CGT of €120,000, but the gift removed £500,000 from his UK estate, saving £200,000 in IHT—a net benefit of £80,000.

Regular Gifting from Income

Another strategy is regular gifts from surplus income, which are exempt from IHT immediately under Section 21, Inheritance Tax Act 1984. HMRC requires evidence that the gifts are made out of income and do not reduce the donor’s standard of living. For a family with UK salary and foreign rental income, documenting the income source and the gift payments is essential. Keep bank statements and a written record of the intention to give.

Navigating Probate for Multi-Country Estates

Probate is the legal process of administering a deceased person’s estate. For multi-country families, probate can involve multiple jurisdictions, each with its own court system, language, and timelines. In the UK, probate is required for estates over £15,000 or those containing property. For a UK-domiciled individual with assets in France, the French notaire system requires a separate succession process, which can take 12–18 months. The UK’s probate registry (2024 data) reports an average processing time of 16 weeks for straightforward cases, but cross-border estates often take longer.

The EU Succession Regulation (Brussels IV)

For EU assets, the EU Succession Regulation (No. 650/2012) allows a testator to choose the law of their nationality to govern their entire estate. A UK national living in France can elect UK succession law in their will, simplifying the process. However, the UK is no longer part of this regulation post-Brexit, so UK wills may not automatically be recognised in EU member states. A separate “international will” or a will drafted under local law may be necessary for each jurisdiction.

Practical Steps for Executors

Executors should obtain a UK grant of probate first, then apply for ancillary grants in each foreign jurisdiction. For example, a grant of probate in England must be “resealed” in a Commonwealth country like Australia or Canada. For non-Commonwealth countries, a fresh application is needed. Digital tools can help coordinate: some executors use platforms like Airwallex global account to manage international payments for legal fees and tax settlements across currencies.

FAQ

Q1: Can I avoid UK IHT by moving abroad permanently?

Yes, but only if you change your domicile and sever all ties with the UK. You must be non-UK domiciled for at least three tax years before death to avoid IHT on non-UK assets. Even then, UK-situs assets (e.g., UK property) remain subject to IHT. HMRC’s guidance states that a new domicile of choice requires clear evidence of permanent relocation, such as selling your UK home and spending fewer than 90 days per year in the UK.

Q2: How does the 15-year deemed domicile rule affect my foreign assets?

If you have been UK-resident for 15 of the past 20 tax years, you are deemed UK-domiciled for IHT purposes, making your worldwide assets liable. For example, if you moved to London in 2010, you will be deemed domiciled from 2025. To protect foreign assets, consider transferring them into an excluded property trust before the 15-year deadline. After that, new additions to the trust may be taxable.

Q3: What is the maximum IHT relief under a double taxation treaty?

Relief is typically a credit for foreign tax paid against UK IHT, limited to the lower of the foreign tax or the UK tax attributable to those assets. Under the UK-US treaty, for example, US estate tax paid on US situs assets can reduce UK IHT by up to 100% of the UK tax due on those assets. The credit cannot exceed the UK IHT liability, so no refund is available.

References

• HM Revenue & Customs, 2024, Inheritance Tax Statistics 2023/24
• HM Revenue & Customs, 2024, IHT Manual (IHTM13000, IHTM04051, IHTM35101)
• UK-France Double Taxation Convention on Inheritance Tax, 1963 (as amended 2008)
• UK-US Estate and Gift Tax Treaty, 1978 (as amended 2002)
• Inheritance Tax Act 1984, Sections 21, 159, and 267