Can foreign Taxes be set off against UK Inheritance Tax?

Unilateral Inheritance Tax Relief in British-German Probate Matters

If a legator was domiciled (or legally deemed to be domiciled) in the UK and possessed assets in other countries, then HMRC will levy inheritance tax on the entire estate, i.e. all assets worldwide (see here).

The problem is: Other jurisdictions may employ an entirely different inheritance tax system and also demand inheritance tax. Germany, for example, does not use domicile but citizenship (nationality) and residency to determine where the (global) assets of the deceased shall be taxed (details here). Therefore, it may well happen that two countries claim national inheritance tax in regard to the same assets. Could combined inheritance tax dues even be higher than the estate?

With some few countries (see here), the UK has double taxation conventions (see here), but with the rest of the world, including Germany, the UK does not. Thus, what happens if the German tax authorities demand inheritance tax on the assets in Germany and HMRC does as well. This could result in the taxes eating up the entire estate.

To avoid this, the beneficiaries (in the UK) and heirs (in Germany) should apply for unilateral inheritance tax relief. By doing this, there may be a chance to reduce UK IHT. To be granted unilateral relief you must provide evidence of the foreign tax, in the form of an assessment of the foreign tax, a certificate of the foreign tax paid and (if available) the official receipt. HMRC asks you to enclose with form IHT400 a ‘certificate of tax paid’ from the overseas tax authority (see line 28, page 25 of IHT400-Integrated: iht400-integrated_form). The technicalities are complicated since unilateral relief is only granted in regard to the foreign assets. The form “Schedule IHT417 – Foreign Assets” (Download_IHT417) states in the explanatory notes: “Double taxation relief: Tax that is similar to Inheritance Tax has been paid on an asset in another country, you may be able to deduct double taxation relief. The form IHT400 Calculation will show you howto work out the double taxation relief.”

However, Germany, for example will tax not only foreign assets but will actually also tax the the global estate, just like the UK does. So the German tax receipt will encompass more than just the tax on German assets. Also, German tax authorities will ask for the “gobal net estate” which you can only give after you have provided HMRC with the net asset woth, i.e. after deducting German inheritance tax as unilateral relief. A classic vicious circle. In practice you will have to ask either German or UK tax authorities to calculate taxes on a theoretical basis.

These pages provide helpful information: HMRC1 and HMRC2 and HMRC3

Our law firm Graf & Partners was established in 2003 and has many years of experience with British-German probate matters. If you wish us to advise or represent you in a German or cross border inheritance case we will send you a comprehensive questionnaire which also explains which documents you will need to submit, e.g. birth, death and marriage certificates, wills, foreign grants of probate etc.

For more information contact German solicitor Bernhard Schmeilzl, LL.M. (Leicester) at +49 941 785 30 53