The figures below show that tax planning around UK IHT can save you up to circa $10million (for a married couple) if you’re not yet fully subject to UK IHT but might become fully subject to UK IHT. Here are the key differences with the UK and US estate tax regimes:
|Threshold for a married couple
|UK IHT (2022/23)
|US Estate Tax (2023)
* the family home allowance may increase this threshold over time up to £1million.
Planning involving trusts to mitigate UK IHT can work effectively for a US taxpayer. Large gifts can be made into an excluded property trust before an individual becomes deemed domiciled. Final regulations have been issued in the US confirming that large gifts made between 2018 and 2025 (when the current estate/gift tax threshold expires) will not lose their tax benefit once the threshold decreases after 2025.
It’s important to consider the Income Tax and Capital Gains Tax (CGT) rules in the US and UK when setting up an excluded property trust, to ensure there is no double taxation. For instance, it might be a good idea in some cases to taint the trust, so that it loses its protected status for UK tax purposes, in order to avoid paying double tax.
Gifts to a charity can be effective from an Income Tax and IHT perspective, but the recipient will need to be to a dual-qualified charity to ensure that this is tax efficient, in both the US and the UK. Furthermore, with changes in the US relating to itemised and standard deductions, it could be that clustering charitable contributions into certain tax years would be more effective. You may also consider using a Donor Advised Fund that has a US/UK dual-qualified status.
Moreover, if you’re domiciled or deemed domiciled in the UK, you may want to avoid making a charitable contribution directly into a US charitable trust because, depending on your circumstances, this could be a chargeable lifetime transfer and potentially subject to an immediate 20% charge (if your nil rate band has been used up).
What should you do?
If you’re a US person in the UK who is considering making gifts or looking to reduce your exposure to UK Inheritance Tax, you should consult with our specialist tax advisers to help you set up the right plan, whether it be tax efficient gifting from a US/UK perspective or the setting-up of an excluded property trust.