How Does Foreign Property Affect Inheritance Tax?

How Foreign Property Affects Inheritance Tax in the UK – What Every UK Taxpayer Needs to Know

Over the years I have sat across the table from hundreds of clients – some with a modest apartment in Spain, others with villas in France or investment flats in Dubai – all asking the same question: will my foreign property be dragged into the UK inheritance tax net? The answer has never been straightforward, and since the major rule changes that took effect on 6 April 2025 it has become even more nuanced. What used to hinge on old-fashioned domicile concepts now turns on your UK tax residence history, and that shift has caught many people off guard.

Understanding the Shift from Domicile to Long-Term UK Resident Test

Let me explain it the way I would in my office in the UK. A UK inheritance tax accountant in the UK , or IHT as we call it at HMRC, is charged at 40 per cent on the value of an estate above the nil-rate band. That band currently sits at £325,000 per person and remains frozen until at least 2030. There is also the residence nil-rate band of up to £175,000 when a qualifying home passes to direct descendants, though that relief only applies to UK residential property in most cases. The key point for foreign property is whether it forms part of your estate in the first place.

How the New Long-Term Resident Rules Work in Practice

Before April 2025 the test was simple: if you were UK domiciled or deemed domiciled, your worldwide assets, including every brick and tile of that overseas holiday home, were in scope. Non-doms only paid IHT on UK-sited assets. From 6 April 2025 onwards the rules switched to a long-term UK resident test. You are now considered a long-term UK resident if you have been a tax resident here for at least ten of the previous twenty tax years. Once that threshold is crossed, HMRC looks at your worldwide estate, foreign property and all. If you fall short of that ten-year mark, only your UK-sited assets are caught.

The Importance of Asset Situs for Foreign Property

The situs of the asset still matters enormously. Foreign land and buildings are situated where they physically stand. A farmhouse in Tuscany or a beach condo in Portugal counts as foreign-sited property. Shares in an overseas company are usually sited where the company is registered. Bank accounts are sited where the bank is located. So for someone who is not a long-term UK resident, that foreign property simply sits outside the UK IHT regime altogether. UK property, by contrast, always falls inside the net, no matter where you live.

Real Client Scenarios – When Foreign Property Escapes or Falls Into the Net

I see this distinction play out constantly with clients who have spent years building a life abroad. Take the retired couple who left the UK in 2018 after twenty years here. In 2026 they are not long-term residents under the new test because they have been non-resident for eight full tax years. Their apartment in Marbella is foreign-sited and therefore escapes UK IHT entirely. Only their UK house and any UK bank accounts or shares would be taxable. Contrast that with the executive who returned to London in 2022 after a decade in Singapore. By 2026 he has clocked up four years of UK residence in the previous twenty-year window. He is not yet a long-term resident, so his Portuguese villa remains outside the UK net for now. But if he stays another six years, the clock will tick over and the villa will suddenly become chargeable.

The Exit Tail – How Leaving the UK Does Not Always Mean Escaping IHT

There is also the exit tail to consider. When someone who has been a long-term resident leaves the UK, their non-UK assets can remain in the IHT net for up to ten years afterwards, depending on how long they were resident. The longer you were here, the longer the tail. HMRC designed this to stop people popping out for a couple of years just to dodge tax. I have advised several families who thought they had escaped only to discover the tail still applied when the first parent died.

Current IHT Thresholds and How Foreign Property Fits In

To make the current position crystal clear, here is how the thresholds and rules line up in practice for the 2025/26 and 2026/27 tax years:

Situation	Nil-Rate Band	Residence Nil-Rate Band (if UK home to descendants)	Foreign Property in Scope?	Effective IHT Rate on Excess
Not long-term UK resident	£325,000	£175,000 (UK home only)	No	0% on foreign assets
Long-term UK resident	£325,000	£175,000 (UK home only)	Yes – worldwide estate	40% (or 36% with charity)
Married couple – both long-term	£650,000 combined	Up to £350,000 combined	Yes	40% on balance
Estate over £2m (taper applies)	£325,000	Reduced or zero	Yes if long-term	40%

These figures have been fixed by successive budgets and the freeze is biting harder every year as property prices climb. A foreign property bought for £200,000 in 2010 might now be worth £450,000. If you are a long-term resident, that entire uplift sits in your estate and eats into the nil-rate band.

Common Scenarios Involving Second Homes Abroad

One of the most common real-world scenarios I encounter involves the UK-based professional who bought a second home abroad for retirement. They assume the foreign property will be taxed only in the country where it sits. That is rarely true if they are long-term UK residents. The local jurisdiction will almost certainly levy its own succession or inheritance tax on the property, and then HMRC may also want its 40 per cent slice on the worldwide estate. That is where double taxation relief becomes critical, but we will come to the mechanics of claiming it later.

UK Property Owned by Non-Long-Term Residents

Another frequent case is the expat who has lived outside the UK for fifteen years but still owns a UK flat they rent out. Under the new rules they are not long-term residents, so the UK flat is caught but their overseas investments and property are not. The distinction matters enormously when the family starts to plan to probate. Executors have to value everything in sterling at the date of death using the HMRC-approved exchange rate, and foreign property valuations often require local valuers plus currency conversion. I have seen estates delayed for months because the family underestimated the paperwork involved.

Impact of the 2025 Changes on Foreign Trusts

The 2025 changes also tightened the rules around trusts. Pre-2025 foreign trusts settled by non-doms are largely grandfathered and can remain excluded property in many cases. But any new additions to trust after April 2025, or trusts settled by someone who is already a long-term resident, will bring foreign assets squarely into the IHT net on ten-year anniversary charges and on death. I always tell clients who settled trusts years ago to dust off the deeds and check the settlor’s status at the time the assets went in. It can make a six-figure difference.

Why Many Families Discover These Rules Too Late

What strikes me after two decades in practice is how often families discover these rules too late. The foreign property that felt like a safe haven suddenly becomes the largest single asset in the estate once the long-term resident test is met. HMRC expects full disclosure on form IHT400, including foreign assets, and they have become increasingly sophisticated at tracing overseas holdings through information exchange agreements. The days of quietly forgetting about that Spanish villa are long gone.

Practical First Step for Anyone Owning Foreign Property

The practical takeaway from all this is straightforward. If you own property outside the UK, you need to know exactly where you stand on the long-term resident test today and where you might stand in five or ten years’ time. A quick look at your UK residence history since 2013/14 using the statutory residence test rules will tell you whether foreign property is already inside the net or still safely outside. For many people this single check can change the entire inheritance planning picture.

Valuing Foreign Property for UK Inheritance Tax Purposes

Once you know the foreign property sits inside the UK IHT net, the next headache is valuation. HMRC requires the open market value at the date of death, converted into sterling using the exchange rate published by the Bank of England or the specific HMRC rate for that day. In my experience, this is where many executors come unstuck. A local estate agent’s informal valuation is rarely enough. You usually need a formal report from a qualified valuer in the country where the property stands, and that report must be translated if it is not in English. I have seen valuations delayed because the overseas valuer did not understand the concept of “open market value” as HMRC defines it.

Dealing with Double Taxation on Foreign Property

Double taxation is another area that keeps me busy. Most countries with inheritance or succession taxes have some form of treaty with the UK, but not all. France, for example, has a double tax convention that allows credit for French droits de succession against UK IHT on the same asset. Spain is more complicated because regional rules vary, and the UK-Spain treaty is limited. In practice I often end up coordinating with local lawyers in the relevant jurisdiction to calculate the credit properly. The relief is given as a deduction from the UK IHT liability rather than reducing the value of the asset itself. Getting the order of calculation wrong can cost thousands.

Planning Opportunities While You Are Still Alive

For those who are long-term UK residents with significant foreign property, lifetime planning can make a real difference. Gifting the foreign property outright to children or into a discretionary trust can remove it from the estate, but you must survive seven years for the potentially exempt transfer to become fully exempt. If you die within seven years, taper relief applies and the foreign property value is still brought back into the calculation. Many clients prefer to use the annual exemption of £3,000 per person or the normal expenditure out of income exemption, though the latter requires careful record-keeping over several years to satisfy HMRC.

Using Trusts Strategically for Foreign Assets

Trusts remain a powerful tool even under the tightened 2025 rules. An outright gift might trigger immediate capital gains tax in the UK or abroad, whereas transferring the foreign property into a UK discretionary trust can defer gains in some cases while still achieving IHT protection after seven years. However, the trust itself may face ten-year anniversary charges at up to 6 per cent if the assets are relevant property. I always run the numbers both ways for clients – sometimes the simplest route is to sell the foreign property, pay any local capital gains tax, and reinvest the proceeds in UK assets that qualify for business relief or agricultural relief if applicable.

Spousal Transfers and the Unlimited Exemption

Married couples and civil partners benefit from the unlimited spousal exemption. Transferring the foreign property to a non-UK domiciled or non-long-term resident spouse can shift it outside the net in certain circumstances, but HMRC scrutinises these arrangements closely under the new rules. If the receiving spouse later becomes long-term resident, the protection can disappear. I have guided several clients through deeds of variation after death to redirect foreign property to a surviving spouse in a way that maximises the available nil-rate bands.

The Role of Life Insurance to Cover IHT on Foreign Property

Life insurance written in trust is one of the cleanest ways to provide liquidity for the IHT bill on foreign property. Because the policy proceeds fall outside the estate when correctly structured, they can pay the 40 per cent tax without forcing the family to sell the overseas asset. I have seen cases where the foreign property was the family’s sentimental favourite, and the insurance policy meant they could keep it rather than sell it under probate pressure. Premiums paid from normal expenditure out of income can also keep the policy itself outside the estate.

Reporting and Compliance Requirements with HMRC

On the compliance side, executors must complete the full IHT400 form when foreign assets exceed certain thresholds, along with supplementary pages for foreign property. Deadlines are tight – six months from the date of death to pay any IHT due, even if probate has not yet been granted. Interest runs from the due date at the current rate, and penalties for late filing or inaccurate information can reach 100 per cent in serious cases. HMRC’s Connect system now cross-checks data from overseas tax authorities more effectively than ever, so under-declaring foreign property is high risk.

Currency Fluctuations and Their Impact on IHT Liability

Currency movements add another layer of complexity. A strong pound at the date of death can reduce the sterling value of the foreign property and therefore the IHT bill, while a weak pound does the opposite. I advise clients to monitor exchange rates when they are seriously ill or updating wills, because timing a transfer or sale can materially affect the outcome. In one recent case, the euro strengthened significantly between the client’s death and the valuation date, pushing the sterling value of a French chalet up by nearly £80,000 and creating an unexpected extra tax liability.

Interaction with Capital Gains Tax on Death

Foreign property also interacts with capital gains tax. On death there is usually a CGT-free uplift to market value for UK tax purposes, which can be helpful if there are large unrealised gains. However, the foreign jurisdiction may not grant the same uplift, leaving beneficiaries exposed to local CGT when they eventually sell. Coordinating the two tax systems requires careful advice, especially in countries like Portugal with its non-habitual resident regime or Italy with its flat-tax options for new residents.

Business Property Relief and Agricultural Relief for Qualifying Foreign Assets

In rarer cases, foreign property can qualify for 50 per cent or 100 per cent business property relief or agricultural property relief if it is used in a qualifying trading business or farming activity. The rules are stricter for overseas assets, and the business must meet the two-year ownership test immediately before death. I have successfully claimed relief on a French vineyard that formed part of a genuine trading operation, reducing the IHT exposure dramatically. But HMRC challenges these claims vigorously, so detailed records and business plans are essential.

Seeking Specialist Advice Early

After advising on foreign property and inheritance tax for more than twenty years, my strongest recommendation is always the same: get proper, tailored advice long before any crisis. The combination of the 2025 long-term resident rules, double tax treaties, valuation requirements, and compliance deadlines creates a minefield that most general practitioners simply do not navigate every day. A single planning step taken now can save tens or even hundreds of thousands of pounds for your family later, while also giving you peace of mind that everything is structured correctly under current UK tax rules.