The figures below show that tax planning around UK Inheritance Tax (IHT) can save up to circa $9 million (for a married couple) if you are not yet fully subject to UK IHT, but might become so. Here are the key differences with the UK and US estate tax regimes:
||Threshold for a married couple
|UK IHT (2020/21)
|US Estate Tax (2021)
* the family home allowance may increase this threshold over time up to £1,000,000.
Planning with 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. Recently, final regulations have been issued in the US confirming that large gifts between 2018 and 2025 (when the current estate/gift tax threshold expires) will not lose the tax benefit once the threshold decreases after 2025.
It’s important to consider the Income Tax and Capital Gains Tax rules in the US and UK if 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 taxation..
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 in order to ensure that this is tax efficient from both an Income Tax and IHT/Estate Tax perspective in the US and the UK. Also, with changes in the US relating to itemised and standard deductions, it could be that clustering charitable contributions into certain years would be more effective, and/or potentially using a Donor Advised Fund that has a US/UK dual-qualified status.
In addition, if you are domiciled or deemed domiciled in the UK, you should avoid making a charitable contribution directly into a US charitable trust as this could be deemed to be a chargeable lifetime transfer and potentially subject to an immediate 20% charge (if the nil rate band has been used up).
What should I do?
If you’re a US person in the UK who is considering making gifts, or looking to reduce exposure to UK Inheritance Tax, you should consult with an advisor to help you set up the right plan, whether it be tax efficient gifting from a US/UK perspective, or the set-up of an excluded property trust.