International Inheritance Tax Treaties Explained

An inheritance tax treaty, sometimes called a double taxation convention, is an agreement between two countries that sets out which of them has the right to tax a particular asset when someone dies, and how relief is given if both countries would otherwise want a share. Rather than leaving families to negotiate this themselves, the treaty does the heavy lifting: it allocates taxing rights, defines how relief is calculated and clarifies which country's rules on tax residency take priority.

Most treaties are bilateral - a direct agreement between two countries, tailored to their specific tax systems.

It is important to note that inheritance and estate tax treaties are not the same thing as income tax treaties and there are far fewer of them. While most developed countries have bilateral income tax agreements, conventions covering inheritance or estate tax are the exception rather than the rule. Never assume that because there is an income tax treaty in place between two countries that there will also be an inheritance tax treaty.

Treaties generally allocate taxing rights according to the type of asset involved, rather than treating an entire estate as a single block.

Real estate is typically taxed in the country where the property is physically located, regardless of where the deceased lived. Financial assets, such as bank accounts and investments, are more commonly taxed based on the deceased's country of residence at the time of death. Business interests can fall either way depending on the structure involved, and personal property generally follows the same residency-based approach as financial assets.

Working out which rule applies to a given asset is rarely as simple as it sounds, particularly where someone has lived in more than one country over their lifetime or holds a mix of asset types across borders.

Where a treaty applies, relief from being taxed twice on the same asset is usually given in one of three ways: a tax credit for tax already paid abroad, an outright exemption for certain assets or a deduction of foreign tax from the taxable value of the estate before domestic tax is calculated. Which method applies, and how generous it is, depends entirely on the specific treaty in question.

Consider a British person who retires to France, keeping a home and an investment portfolio in the UK. It is one of the most common cross-border patterns in Europe, and it happens to sit under one of the world's few dedicated inheritance tax treaties: the UK-France convention of 1963, which remains in force today.

The treaty operates on the principle of ‘domicile’ rather than mere residence. Because the UK and France define ‘domicile’ under different legal frameworks, a conflict can arise where both nations claim the individual is domiciled under their own domestic rules. The treaty provides a specific tie-breaker mechanism to resolve this: it first looks to the location of the permanent home, then the centre of personal and economic interests, followed by habitual abod and finally nationality. 

The country determined to be the ‘domicile’ under this process acquires the primary right to tax the worldwide estate, while the other country retains taxing rights only over assets situated within its borders, such as the UK property.

For the individual in this scenario, if the tie-breaker rules designate French domicile, France taxes the worldwide estate (including the UK home and portfolio). The UK retains the right to tax the UK property itself. Crucially, the treaty prevents double taxation by allowing UK tax paid on the UK property to be credited against the French tax liability on that same asset, rather than taxing the asset fully in both jurisdictions.

However, the application of these rules is highly complex. The interaction between UK ‘deemed domicile’ rules, French forced heirship laws and the specific mechanics of UK trusts can produce unexpected outcomes that a general reading of the treaty might not reveal. Given these nuances, expert cross-border tax and legal advice is essential to ensure the estate is structured correctly and to navigate the technicalities of the 1963 Convention.

Where no inheritance tax treaty covers a particular country pair, the two systems have no shared mechanism deciding who taxes what or how to divide it fairly. What often fills that gap is not a treaty at all, but a domestic rule each country applies on its own terms - unilateral relief.

The principle is simple in outline. If foreign inheritance or estate tax has genuinely been paid on an asset, the home country gives credit for that foreign tax against its own tax on the same asset, rather than taxing the full value again from scratch. The credit is almost always capped at the amount of domestic tax that would otherwise be due on that asset - so it prevents the domestic tax bill going above what it would have been anyway, but it does not guarantee the family ends up no worse off than if only one country had taxed the estate at all.

This is the crucial difference from treaty relief. A treaty allocates taxing rights in advance and sets out precisely how relief is calculated, with both countries bound by the same agreed terms. Unilateral relief is one country acting alone, under its own rules, with no obligation on the other country to coordinate, reduce its own claim or recognise the credit given. Where the foreign tax rate is higher than the domestic one, the excess is simply not recoverable. That is why unilateral relief is generally described as partial, rather than complete, protection.

Take a British person, UK-domiciled at death, who owns a holiday property in Spain. There is no inheritance tax treaty between the UK and Spain, so there is no agreed mechanism dividing the taxing rights between the two countries.

Spain will charge its own inheritance tax - Impuesto sobre Sucesiones - on the Spanish property, calculated under Spanish rules, which vary by region and by the beneficiary's relationship to the deceased. Simultaneously, because the deceased was UK-domiciled, the UK treats the Spanish property as part of the worldwide estate and taxes it under UK Inheritance Tax (IHT) rules, regardless of where the asset is located.

Without any relief, the same property would be taxed in full by both countries. Instead, the UK's domestic unilateral relief provisions allow credit for the Spanish tax actually paid on that property, set against the UK inheritance tax due on the same asset. If the Spanish tax paid is lower than the UK tax that would otherwise apply, the credit absorbs it and the family pays the balance to the UK. If the Spanish tax is higher, the UK credit is capped at the UK liability on that asset - so the excess Spanish tax is absorbed by the estate, with no refund available from the UK.

The outcome, in other words, depends heavily on which country's tax happens to be higher on that particular asset, which is exactly the kind of uncertainty a treaty is designed to remove, and unilateral relief is not. Again, the complexities at play here highlight the need for expert cross-border advice to plan the estate structure and potentially mitigate the risk of double taxation.

As we explored in our piece on multi-jurisdictional estate planning, owning property, holding investments or having close family in more than one country changes the shape of your estate planning considerably. Whether a treaty applies to your specific combination of countries, and how it interacts with your residency and domicile position, can materially change how much inheritance tax your estate ultimately pays, and where.

Rules on tax residency and domicile are not always intuitive, and they continue to evolve. Several countries, including the UK, have recently reformed how long-term residence is assessed for inheritance and estate tax purposes, and what applied to your situation a few years ago may not apply today. This is true whether any double taxation treaties pertaining to your situation are generous, limited or non-existent.

Because treaty coverage varies so much from one country pair to the next, and because the rules within a treaty can be detailed and highly specific, it is clear that cross-border estate planning is not something to navigate alone. 

Hoxton Wealth's advisers have a wealth of experience in international estate structuring and assist many clients whose lives and assets span more than one country, ensuring seamless asset transition across multiple legal and tax frameworks. 

Contact Hoxton Wealth for bespoke advice to provide clarity, security and confidence over the future of your wealth.