There has been a lot of talk about the gift and estate tax exemption, currently $11.7m, being cut by half. Although nothing is guaranteed, we expect this to come into force as of 1st January 2022. If the allowance is not utilised before the end of the year, it will be lost.

We have summarised the things you need to think about here.

We have run through a client example here to show the tax implication of not using the allowance and how this can impact your net worth.

Background

Our long-term client approached us looking for planning advice, he was exploring the planning opportunities available regarding the $11.7m.

In summary:

  • The family are US citizens resident in the UK
  • They have two children of adult age
  • They have been living in the UK for 22 years
  • Total assets of $15.5m ($13.5m in joint investment, $2m UK property)

He was planning on making gifts in the next few years to his children, but the potential change in estate tax has accelerated the need to do so.

Cashflow analysis

Step one was to undertake a full cash flow analysis, the reason behind this was to determine how much could be gifted away whilst maintaining their current lifestyle and not drawing down capital.

We modelled three different gifts levels to see how this would impact the client:

01 Current Position – No Gift

Running the figures through our cashflow model ,we can see that the total income produced, exceeds the income required. Initially the income was c.$100,000 greater than income required. Over time with re-investment this increases to over $150,000.

02 Full use of the exemption – $11.7m Gift

The second scenario was to use all  the lifetime allowance. This pushes the current income levels under the required amount, forcing the client to draw from the main pot and eroding the capital.

03 The Middle ground – $8m Gift

For this family we settled on a gift of $8m. This amount allowed the family to utilize a big chunk of the “use it or lose it” allowance, whilst maintain their personal income requirements, and without drawing into the capital pot.

How would this have changed if the gift was made after the rule change?

The numbers really do speak for themselves. There are a lot of “ifs” but on the basis these things are followed through the saving to our client was $800,000

UK Tax Implications

It is important to note that the client is UK tax resident. This means the client will likely be captured within the scope of UK inheritance tax, however due the client’s age and health we assume a Potentially Exempt Transfer (PET) occurs. Under UK IHT (Inheritance tax), if an individual survives for at least 7 years after making the gift, the gift will be considered outside of the estate for the purpose of Inheritance tax.

 

 

To get more US Expat content direct to your inbox monthly, sign up to our newsletter here.
If you would like to speak to someone about your investment requirements, please use the contact from here.

 

Disclaimer:
London & Capital are not tax advisors and this is our understanding of the rules. The above should not be treated as tax advice and you should consult a tax consultant to address your specific needs to determine if the structures above are appropriate for your circumstances.
The value of investments and any income from them can fall as well as rise and neither is guaranteed. Investors may not get back the capital they invested. Past performance is not indicative of future performance. The material is provided for informational purposes only. No news or research item is a personal recommendation to trade. Nothing contained herein constitutes investment, legal, tax or other advice.  This document does not represent primary research; it provides the views of the London & Capital investment team examining the fundamental background, economic outlook and possible effect on asset markets. This document is not an invitation to subscribe, nor is it to be solely relied on in making an investment or other decision. The views expressed herein are those at the time of publication and are subject to change.  Correct at time of going to press. © London and Capital Asset Management Limited. All rights reserved.
London and Capital Asset Management Limited is authorised and regulated by the Financial Conduct Authority of 12 Endeavour Square, London E20 1JN, with firm reference number 143286. Registered in England and Wales, Company Number 02112588.  London and Capital Wealth Advisers Limited is authorised and regulated by both by the Financial Conduct Authority of 12 Endeavour Square, London E20 1JN, with firm reference number 120776 and the U.S. Securities and Exchange Commission of 100 F Street, NE Washington, DC 20549, with firm reference number 801-63787. Registered in England and Wales, Company Number 02080604.