US persons currently benefit from a generous lifetime exemption from US federal estate and gift taxes of $12.06 million. This is due to 'sunset' from 1 January 2026 to $5 million, as indexed for inflation (expected to be approximately $7 million). Many US taxpayers with estates exceeding $7 million are therefore taking steps to take full advantage of the current allowance. If they have UK connections, however, they should ensure they also consider any UK tax implications before acting.
Estate planning could have UK tax implications if an individual :
- is UK domiciled. This can include individuals with historic or family connections to the UK, even if they have never lived, or no longer live, in the UK;
- is UK deemed domiciled. Broadly, this means any person who has been UK resident in 15 of the last 20 UK tax years;
- is UK resident;
- owns UK assets; or
- intends to give assets to, or to trusts for, UK resident and/or domiciled individuals.
The UK inheritance tax (IHT) allowance ("nil rate band"), is only £325,000. Given IHT and federal estate tax are both charged at 40%, this means a taxpayer subject to both taxes may achieve nothing by seeking to reduce only their estate tax exposure. Even worse, they could inadvertently trigger UK tax in excess of the US tax they hoped to save.
Some key UK tax considerations of which US/UK taxpayers should be aware are:
- Gifts to trust in excess of £325,000 made by UK domiciled, or deemed domiciled, individuals can trigger an immediate 20% IHT charge, plus additional IHT if the donor does not survive seven years and ongoing IHT charges within the trust.
- The gift by a UK resident person of an asset that has increased in value may trigger UK capital gains tax (CGT). UK CGT is calculated in sterling, so a gain can be realised for UK purposes due to exchange rate fluctuations even if the value has not increased in its base currency.
- Even if the donor is neither UK resident nor domiciled, a gift of a UK asset could trigger immediate IHT at up to 20%, whilst a gift of UK real estate could trigger UK CGT at up to 28% on any unrealised gain. Whilst it is sometimes possible to defer any CGT liability when both taxes would be payable simultaneously, such relief must be claimed and is subject to a number of conditions.
Estate planning for individuals subject to both US and UK tax is complex and requires advisors familiar with the tax considerations on both sides of the Atlantic.