Inheritance tax and property abroad

Annie Shaw / 22 September 2014

What are the inheritance tax implications of leaving a property abroad to your children? Is it better to sign the property over while you're still alive?

A reader writes:

If I wanted to spend the winter months in Spain on retirement, could I buy a small apartment there and put my house in England in joint names with my daughter, who lives with me?  How would this affect my inheritance tax (IHT) situation? I am 68 years old.

Annie Shaw replies:

You can put the house in the names of whomsoever you like as long as they agree to it. The arrangement you are suggesting would, however, make no difference to your IHT position.

Since you would be retaining an interest in the house and continuing to use it in the summer months, the portion of the house you gifted to your daughter would be a "gift with reservation of benefit", and when you died it would be treated as if you still owned it for taxation purposes.

HM Revenue and Customs guidelines suggest that, if you give away a property and wish to escape the gift with reservation net, you may not return to the property and stay in it for more than two weeks per year in the absence of the person you have given the property to, or for more than one month if they are present in the property at the same time as yourself. 

Some exceptions

There are some other minor exceptions, such as if you are staying in the property that you have previously given away because you are convalescing after medical treatment, or your own residence is being refurbished.

If you divided the house physically and had no interest in, or use of, the part you gave to your daughter – say, you divided the property into flats – then, if your estate is worth more than the IHT threshold (£325,000 in 2014 to 15), as long as you lived seven years after making the gift, the value of it would fall out of your estate and no longer be liable to taxation.

Read Paul Lewis' guide to inheritance tax here...

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The material is for general information only and does not constitute investment, tax, legal, medical or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.