Every week, Mansion Global poses a tax question to real estate tax attorneys. Here is this week’s question.
Q: I'm a British citizen and own several properties around the world. I'm going through the estate planning process and am considering leaving my children the homes. What are the tax implications for both me and my kids?
A: There are two relevant taxes: the capital gains tax of 28% for U.K. residential property and the 40% inheritance tax, said Mark Pearce, partner at Irwin Mitchell Private Wealth in London.
If you are born of British parentage, you are most likely a "domiciliary" of the United Kingdom, even if you don’t reside there, said Mark Summers, partner at Charles Russell Speechlys AG in Zurich. Thus you would be subject to U.K. inheritance tax laws on global assets.
More:What Are the Tax Implications for Foreign Nationals Giving U.S. Real Estate to Their Children?
The type of tax and the amount that is charged depends on when you give the property to your children and when your death occurs.
If you give foreign properties to your children while you are still alive, you are deemed to have sold them at market value and will have to pay capital gains tax if the properties’ values increased while you owned the real estate, Mr. Pearce explained. Capital gains taxes are paid by the owner passing along the property.
No inheritance tax is due unless you continue to use the properties or unless you die within seven years of making the gift, he said.
Should you die while owning the properties, an uplift similar to the United States’s step-up in basis, in which the base cost of a property is increased to the value upon death, is applied and your children won’t have to pay capital gains tax on any increases that occurred during your ownership, Mr. Pearce said.
But if at death you own the property through a company, this uplift won’t happen, Mr. Summers said. Regardless, the properties will still be subject to a 40% inheritance charge.
"If you are advised to use a company to own the property to sidestep local taxes and inheritance laws, be careful that you are not leaving your children a very large capital gains tax bill later," Mr. Summers said.
More:What Do I Need to Know About the U.K. Stamp Duty Land Tax?
For younger families, lifetime gifts may be attractive, particularly if the property value hasn’t appreciated significantly. But parents who are more elderly may want to retain the property because of the risk of incurring both a capital gains tax and an inheritance charge if they die within seven years of making the gift, Mr. Pearce noted. If the properties are passed along after the death of the parents, only the inheritance tax will come into play.
In addition, if a U.K. tax resident transfers assets into a trust, a 20% tax generally is assessed, with an additional 6% due every 10 years, Mr. Summers said.
This affects U.K. nationals moving to the U.S. or Canada, where trusts are commonly used in estate planning, or if U.K. nationals own real estate in one of those two countries, he observed.
One important thing to note is that the U.K. property tax laws are in addition to the tax laws of the countries where the properties are located. You should seek advice on the laws in the countries where your properties are located, Mr. Pearce said.
Any inheritance tax a country charges on real estate usually can be credited against the inheritance tax owed to the U.K., even if there is no tax treaty, Mr. Summers said.
More:U.K. Prime Home Buyers Trimmed Budgets After Stamp Duty Hikes
Different countries’ inheritance laws also can restrict who can inherit property. Many countries require that real estate to your children be left in fixed proportions, Mr. Summers said. "For instance if a person dies owning real estate in Monaco, Monégasque law requires that if they have one child, a ‘reserved portion’—in this case, half— of the property must pass to them. The other half you are free to leave by will to whomever you choose," he said. "In countries with Sharia-based law, the principles will often see sons favored over daughters."
But the new Succession Regulation in the European Union often means that you can pass a property under English law principles to whichever child you wish. Under the regulation, a person can decide whether to submit to the inheritance laws of the country where they have their main residence or the country of the bequeathed property, according to Mr. Summers.
"Keeping assets in the family bloodline is seen as a matter of public policy," so many European countries assess higher taxes when property is left to stepchildren instead of blood descendants, he said.
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