US Estate (and UK Inheritance) Tax Planning for US citizens living in the UK
The client challenge
US citizens resident in the UK need to take into consideration not only the US Estate and Gift tax rules but also the UK Inheritance tax (IHT) regime. The interaction of these two sets of rules can be very complex.
The Deloitte approach
Fortunately the Deloitte US/UK HNW team has years of experience in dealing with these rules and can help summarise the most complex of issues in plain English.
The complexity of the planning required will depend on whether the US citizens is regarded as non-domiciled in the UK for IHT purposes (recent proposals will a deem a non-domiciled individual as being domiciled in the UK if they have lived here for 15 out of 20 years).
Non domiciled individuals
For non-domiciled individuals planning will generally focus on a US gifting strategy with some simple UK planning techniques (e.g. buying UK property with a mortgage to reduce the net value of the UK property subject to IHT)
The typical standard US Estate and Gift tax planning might include the following;
- Program of regular giving to make use of $14,000 per donee exemption (if married could use gift splitting provisions to maximise this).
- Gifting of assets expected to appreciate.
- Establishing a Dynasty trust (this might be intentionally structured as a Grantor trust for US income tax purposes).
- Set up of irrevocable life insurance trust – might make use of special provisions known as ‘Crummey powers’ to ensure that there is $14,000 per donee exemption.
- Transfers into a s529 Plan for educational expenses
- Direct payment of educational or medical expenses for family members.
- Use of Grantor Retained Annuity Trusts.
UK domiciled individuals
Once a US citizen has become deemed domiciled in the UK for IHT purposes their planning becomes much more complicated as their worldwide assets will become exposed to UK IHT.
Although the top rate of US Estate tax and UK IHT is currently the same (40%) the US exclusions are much more generous potentially resulting in a much lower effective US estate tax charge.
Immediately prior to a US citizen becoming deemed domiciled in the UK the focus of any planning should therefore shift towards minimising UK IHT. This might involve;
- Establishing a UK excluded property Trusts (a US style “Dynasty trust” might also serve for this purpose).
- Making Gifts out of surplus income. (This could work alongside US program of regular giving making use of $14,000 per donee exemption and could also be used to fund a trust).
- Ensuring legacies qualify for UK IHT exemption.
- Investing in assets which qualify for Business Property Relief and/or Agricultural Property relief.
- Gifting assets (especially appreciating assets) so long as the donor is expected to live for greater than three years.
- Establishing family limited partnership/company and making gifts of partial interests (often used as an alternative to trusts).
The intention of such planning is to optimise the US citizen’s position by reducing their taxable estate as much as possible while ensuring that the overall exposure to US Estate tax or UK IHT is optimised.
It should be noted significant complications can arise if a US Citizen is married to someone who is UK domiciled and/or is not a US citizen. In the latter case provisions for a Qualified Domestic trust (QDOT) may be required to be included in the will. If properly structured this can also qualify for UK marital exclusion.
Where a taxpayer is subject to both US Estate tax and UK Inheritance tax it is vital that expert advice is taken in respect to formulating a tax efficient estate plan as the cost of getting it wrong can be quite considerable.