Stepping Stones: What Americans in the UK need to know about estate and inheritance tax planning.

Much the same as when income tax planning, US citizens living in the UK need to consider both US and UK tax rules when it comes to gift, estate and inheritance tax planning.

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While Income Tax planning is normally the prime focus for most individuals, gift, estate and inheritance tax planning is often just as important for the transfer of property to the surviving member of a family. For those with a US and UK connection, both US and UK tax rules should be considered in conjunction to ensure the preservation of wealth during lifetime and after death for the eventual beneficiaries of the individual property. 

To highlight how these rules can be easily navigated, take a look at what steps Jason could take to save money through estate and Inheritance tax planning.

Jason moved to the UK from New York in December 2004. He is a US citizen. In July 2005 he married Maria, but they are since divorced. 

Jason is 51 and in good health, he has three children. 

Jason owns a UK property worth £1m, a US bank account worth $3m and cash in UK bank accounts worth £1.5m. Jason wishes to pass his wealth to his children. 

Jason heard that the UK Inheritance tax (IHT) rules have changed recently for non-UK Domiciliaries and he was concerned about his worldwide exposure to inheritance/estate tax. 

Below is how Jason can reduce his and his family’s global tax exposure to inheritance and estate tax.

What can Jason do?

As Jason has US and UK estate/inheritance tax exposure, with no planning in place he will most likely be exposed to a 40% inheritance tax bill on his worldwide estate. 

In the UK each individual qualifies for the nil rate band (currently £325,000), meaning the first £325,000 of their estate is excluded from UK IHT. US Estate or Gift Tax is only applicable where the total value of a deceased US citizen’s estate exceeds the lifetime exclusion amount. Under the new US tax reforms, the lifetime exclusion has doubled 

As Jason’s estate ($6.25m) is under the US threshold his primary concern will be UK Inheritance Tax, but he should consider how to preserve his exemption where possible. 

Lifetime Gifting

One of Jason’s UK bank accounts has a cash balance of £500,000. He would like to pass the cash to his children in a US and UK tax efficient manner. He wants to give them the gift directly.

For UK tax purposes a gift can be fully excludable from IHT if the donor survives seven years from the date of the gift. If the donor dies within seven years the gift remains taxable in their estate, however Jason is in good health and expects to live seven years.  

For US estate tax purposes any lifetime gifts will be deducted from the lifetime allowance (currently per person) but, it is possible to gift up to the annual allowance (currently $15,000) of your estate, per recipient, each year without reducing your estate allowance. 

Jason could therefore gift up to $15,000 to each of his three children per year, with the gifts remaining outside the scope of US estate tax. Provided he lives seven years from the date of the gift, they will also not be subject to UK IHT. In addition, there is an annual UK gift allowance of £3,000 to each child and potentially if the gifts are considered regular and out of Jason’s income, they could be entirely exempt gifts without the need to survive seven years.

If Jason gifts $15,000 (approx. £11,500) to each of his three children annually, over a 10 year period, he could exclude £345,000 from his taxable estate. 

If Jason remains with the US gift annual allowance of $15,000, he could save £138,000 in taxes.

Deemed UK Domicile

UK domiciled individuals are subject to UK Inheritance Tax (IHT) on their worldwide assets. Non-UK domiciled individuals are only subject to UK IHT on their UK status assets.

Under General UK Law, it is possible to keep your ‘domicile of origin’ in the US, where domicile is based on your intention to return to the US. However, since 6 April 2017, it is possible to acquire deemed-UK domiciled status when an individual has been resident in the UK for at least 15 out of the last 20 tax years. 

As things stand, since he arrived in the 2004/05 UK tax year, Jason will be deemed UK domiciled from 6th April 2019. With no planning in place, from this point his worldwide estate in excess of £325,000 will be subject to UK IHT.

Excluded Property Trust

Jason does not need all of the money within the US investment portfolio. He would like to give $2m of the funds to his children, but restrict them from withdrawing until they are 25. Jason could set up an excluded property trust before 6th April 2019 with the funds he would like to give to his children. 

For a UK domiciled individual, settlement into a trust is a chargeable inheritance tax event. Jason is however not domiciled in the UK so only his UK assets are subject to UK IHT. As the US account is non-UK based and Jason is currently not deemed domiciled, he could therefore settle the funds into a non-UK trust, creating an excluded property trust which will be outside the scope of UK IHT. The funds can therefore be passed to his children without being subject to UK IHT. 

If Jason settles $2m (£1.5m approx.) into the new trust, he could save his estate £600,000 in inheritance tax.

Working with Buzzacott, Jason would benefit from timely, practical and cost effective joined up US/UK tax advice. We would also be able to refer him to a law firm to help with the legal side of setting up a will and the creation of an excluded property trust outside the UK.

If you're grappling with gift, estate or inheritance tax planning and think we could work together to make life easier, get in touch via the form below.

The full Stepping Stones series can be found here.

Article taken from issue 7 Beyond the Numbers

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