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TonyTax
TonyTax, Tax Consultant
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Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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My son-in-law is an Italian citizen, resident in Italy; he

Resolved Question:

My son-in-law is an Italian citizen, resident in Italy; he bought a flat in UK 7 years ago for £700k; he is likely to die within 6 - 18 months; the flat is now worth about £!m; he wants to leave it to his 2 daughters (wife will have enough in Italy); what are the tax implications? Should he make the transfer now?
Submitted: 3 years ago.
Category: Tax
Expert:  TonyTax replied 3 years ago.
Hi.

Is your daughter UK domiciled? Are your graddaughters Italian nationals?
Customer: replied 3 years ago.

My daughter is Italy-resident (has been for 24 years); would probably still be regarded by HMRC as UK-domiciled. Granddaughters born in Italy; registered as UK nationals and hold UK passports (so dual?).

Expert:  TonyTax replied 3 years ago.
Thanks.

Leave this with me while I draft my answer. There is a fair amount to consider so please bear with me.
Expert:  TonyTax replied 3 years ago.

Hi again.

Given your son-in-law's life expectancy, there really wouldn't be anything to gain by gifting the UK property to his daughters now as opposed to leaving it to them in his will. This is due to the fact that when an individual dies, the value of gifts made in the seven years before death are included in the valuation of the estate for Inheritance Tax purposes. Take a look here, here and here for information on UK IHT.

As your son-in-law is non-UK domiciled, only his UK assets will be subject to IHT in the UK. The first £325,000 will be charged at 0% (the nil-rate band) and the balance will be charged at 40%. On a £1 million mortgage free property, the liability will be £270,000.

If your wife is UK domiciled, the property could be left to her or gifted to her by her husband IHT free as gifts and bequests of assets between spouses are exempt. Should your wife then pass the property to her children, then that will be a potentially exempt transfer and if she lived for at least seven years after making the gift, it will fall out of her estate for UK Inheritance Tax purposes. Taper relief applies to gifts made in the seven years before death after the end of the third year following that in which the gift was made as you can read here. The full IHT spousal exemption does not apply to transfers between two non-UK domiciled spouses and any such transfer is limited to a tax free sum of £650,000. Look here for more information on that and on the election to be treated as UK domiciled. Clearly, there may be an Italian tax angle to be considered which is beyond my expertise so you son-in-law would need to seek out specific advice.

There are various methods which might work to take the UK property out of the UK IHT net altogether which you can read about here and which specific advice should be sought on if they are of interest.

I hope this helps but let me know if you have any further questions.

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