IHT applies to assets passed down following the owner's death. While certain exemptions and allowances can reduce the tax payable, IHT is charged at 40% on the value of assets exceeding the applicable threshold.
Historically, overseas investors have used offshore structures to hold UK real estate. These arrangements provided protection from IHT, ensured privacy, and enabled efficient transfer of assets. However, changes in UK tax legislation - including the 2017 reforms targeting non-UK domiciled individuals - have eliminated the IHT advantages of such structures. Today, IHT applies to UK residential property regardless of nationality, residency, ownership structure, or passport.
Furthermore, international initiatives such as the Common Reporting Standard mean that government agencies worldwide exchange tax information. Professional service providers, including legal and financial advisors, are bound by law to report relevant details to tax authorities.
Given these changes, overseas investors face limited options to protect their UK assets from IHT:
Sell - Selling the asset and surviving for at least two years ensures the proceeds can qualify for certain reliefs, provided the asset qualifies.
Gift - Gifting the asset to another individual can remove it from the estate, but the donor must survive for seven years for the gift to be exempt.
Insure – Taking out an insurance policy that will settle the IHT liability as and when it falls due.
Insuring against this inevitable tax is an effective way to retain control and ensure that liquidity is in place to meet the liability. If the beneficial owner decides to dispose of the asset after taking out insurance, the policy can be surrendered and premiums returned.
When an individual passes away, their assets automatically fall under the control of HMRC. The IHT liability must be settled within six months of death, and assets cannot be sold or transferred until the tax bill is paid. Failure to settle within this timeframe can result in interest charges, or worse, fire sales, where HMRC may force the sale of assets at undervalued prices to recover the liability.
If the property in question is mortgaged or encumbered by other debt, these obligations must also be cleared upon the owner’s death. Insurance can cover both IHT and outstanding debt, enabling the asset to pass unencumbered to heirs.
Despite its effectiveness, insuring against IHT liabilities is sometimes overlooked by advisors in the UK, who may lack exposure to the international insurance market. Tailored insurance solutions designed for overseas investors can fill this gap, ensuring estate planning goals are met seamlessly.
At Convici Capital, we have partnered with a number of experts who are able to advise on all types of insurance. Please do contact the team if you’d like to learn more.