Subscribe now to our Podcast series ‘A United Approach’ for unprecedented insights into how you can navigate the complexities faced by US expats in the UK.
Robert Paul, Partner in the US Family Office spoke to Chris McLemore, Attorney at Butler Snow and Rachel Davison, Senior Counsel at Taylor Wessing about how to create an estate plan which works on both sides of the Atlantic, we have summarised their discussion below.
Estate planning can be complex at the best of times, but it is even more important to get it right for Americans who have been in UK for a number of years. This is because a person’s tax status changes significantly after they have lived in the UK for 15 years.
Following a change to legislation in late 2017, anyone who has lived in the UK for 15 out of 20 years will be ‘deemed domicile’ for all UK taxes. Anyone caught in this situation will be taxed in the UK on their worldwide income and gains, in addition to being subject to UK inheritance tax (IHT) on worldwide assets.
This can create a tricky scenario because it means taxpayers must ensure that their offshore assets are compliant with both US and UK tax authorities. It becomes even trickier for anyone who failed to put an effective plan in place before they hit the 15-year mark, given the differences between the US and UK tax structures.
While the US has an $11,180,000 lifetime gift and estate tax allowance, as well as an allowance for giving $152,000 to a non-American spouse each year, these allowances are not recognised in the UK. Here the IHT of 40% is due on amounts above £325,000 if a person dies within seven years of the gift date. The only exception is transfers to a spouse, which are not subject to IHT in the UK.
The disparity between US estate tax and British IHT may make things challenging, but this does not mean effective estate planning is impossible. For starters, there are various measures that people need to put in place regardless of the size of their estate or the amount of time they have lived in the UK. This includes having an up-to-date will that names someone’s chosen beneficiaries and putting in place powers of attorney.
For the most part, a potential solution is to follow simple IHT planning practices. To that end, taking advantage of the UK’s gift regime is frequently a successful course of action. With this strategy, a person chooses to gift assets during their lifetime, and provided they survive for seven years, those assets will be outside of their estate for IHT purposes.
A commonly used structure in the US is a trust, which is a less powerful tool in the UK because of the lower limits. It is still possible to use one in the UK, but only by transferring the exempt amount of £325,000 every seven years.
Overall, the main point to remember when performing cross-border estate planning is to avoid the pitfalls just as much as taking advantage of allowances and opportunities. In this case, the focus needs to be on making sure the estate plan is up to date and reflects current tax rules, especially given the fact that regulations are constantly changing.