How Brits avoid Inheritance Tax in the United States UK/UK Tax Treaty Americans moving to the UK IRS Physical Presence and Bona Fide Residence Tests American expats buying property in the UK Americans paying UK tax Brits moving to the United States will need to plan for Inheritance Tax (IHT), sometimes called Estate Tax. There could be a double IHT payment in the US and UK for British ex-pats. Resident and non-resident aliens may be in the US for a long-term or short-term stay. Upon their death, their estates may face adverse US Estate Tax consequences without planning. Lifetime transfers by non-US citizens may also be subject to US Gift Tax. Non-US citizens who are non-US domiciliaries could also be subject to Estate Tax where their US-based assets exceed the value of $60,000. If the US/UK tax treaty applies, it is possible to claim this to reduce the US tax exposure. This will depend on citizenship status and circumstances surrounding US-based and worldwide assets. Individuals are subject to US Estate Tax and Gift Tax on all property transfers from one person to another while alive (under Gift Tax rules) or after death (under Estate Tax). The current rate of US Estate Tax and Gift Tax is up to 40%. Transfers from a US citizen to their US citizen spouse are exempt from both taxes. There is no spousal exemption for assets left by a US citizen to a non-US citizen spouse. What are the basics of the IRS Estate Tax for Brits? As real estate property accountants serving thousands of UK & US landlords that purchase buy to let properties, we know that the subject of United States IRS Estate Tax for Brits can be daunting. Estate Tax, also called Inheritance Tax, is primarily paid to the United States by wealthy individuals before their assets are passed to their heirs. It was created over 100 years ago to raise revenue from those with the greatest ability to pay, encourage charitable giving, and limit the US’s concentration of wealth and power. It has also been termed the Death Tax, but not all Americans pay. The vast majority of deaths in the US do not trigger Estate Tax liability. The tax is assessed on estates with assets exceeding $12,060,000 or $24,120,000 million for married couples in 2022 Families with an estate worth less than this amount pay nothing. Most families with estates in the US worth $20+ million or more will have undertaken careful tax planning to avoid it. The Estate Tax is graduated with a top rate of 40%. The average effective tax rate is 17%. Please note that the top estate tax rate charged by the IRS in the United States is the same inheritance top tax rate levied by HMRC in the United Kingdom. It is most likely that people living in the United Kingdom will pay a greater amount of UK Inheritance Tax to HMRC than those with the same asset values in the United States. It has been estimated that only 1 out of 700 deaths pay Estate Tax. Estate Tax is assessed by the federal government and several state governments in the US. It is calculated based on the estate’s Fair Market Value (FMV) rather than what the deceased originally paid for it. Since 2018, US citizens and US domiciliaries have been subject to Estate Taxation and Gift Taxation at a maximum tax rate of 40%. Non-US domiciliaries are subject to US Estate Tax and Gift Tax regarding certain types of US-based assets with an exemption of $60,000 only available for transfers at death. That said, we must pay particular attention to the below – £325,000 UK IHT lifetime allowance (40% tax on excess) – $12,060,000 US Estate tax lifetime allowance (18% to 40% on excess) You will most certainly pay more UK inheritance Tax than you would if your assets are sited in the United States. How much is US Inheritance Tax? Estate Tax and Gift Tax rates are the same (between 17-40%) whether you are a US citizen, US domiciliary or non-US domiciliary. A person is considered domiciled in the US for Estate Tax and Gift Tax purposes if they live in the US and have no present intention of leaving. Determining domicile for US Estate Tax and Gift Tax purposes is different than determining US Income Tax residence. It is possible to be a resident for Income Tax purposes, but not US-domiciled for Estate Tax and Gift Tax. To determine whether you are a US domiciliary, the following factors are taken into account: – Statement of intent (in VISA applications, tax returns and Will) – Length of US residence – Green Card status – Lifestyle in the US – Ties to the former country – Country of citizenship – Location of business interests – Places where voting is registered and a driving licence is maintained A person is considered a non-US domiciliary for Estate Tax and Gift Tax purposes if they are not considered a domiciliary. Two or more countries may consider the same person a domiciliary. Specific assets may be subject to Estate Tax or Gift Tax in more than one country. This is where the US and UK tax treaty comes into play to ensure that individuals are not taxed twice. How much Estate Tax do Green Card holders pay? Surrendering a Green Card will cause you to be considered a non-resident alien for US Income Tax purposes. This is based upon the assumption that you do not spend substantial time in the US after surrendering your Green Card, in which you may become a US resident under the ‘Substantial Presence’ test. Upon surrendering your Green Card, you will need to consider whether you are subject to the US Expatriation Tax or ‘Exit Tax’ as it is also called. Having a Green Card is one way to obtain US residency and allow for easier travel into and out of the country. It may also allow you to remain in the US indefinitely. An individual who is considered domiciled in the US for Estate Tax and Gift Tax purposes is subject to US Estate Tax and Gift Tax on worldwide assets. The Estate Tax for Green Card holders is the same for US citizens. Strategies exist to lower the Estate Tax bill, and it is essential to note which state you are domiciled in. State estate tax and laws vary across the US. There is no federal Inheritance Tax for US persons. Inheritance Tax is paid by the estate so that the proceeds a recipient receives are not double-taxed. How can I avoid paying Estate Tax in the US? The Estate Tax is a tax on your right to transfer property at your death. It consists of accounting for everything you own or have certain interests in at the date of death. The total of all these items is called your ‘Gross Estate’ at Fair Market Value (FMV) and is used not what you paid for items or their values when you acquired them. The assets can include cash and securities, real estate, insurance, trusts, annuities, and business interests. Once you have accounted for the Gross Estate, certain deductions are allowed in arriving at your ‘Taxable Estate’ figure. These deductions may include mortgages and other debts, estate administration expenses, property that passes to surviving spouses and qualified charities. The value of some operating business interests or farms may be reduced for estates that qualify. After the net amount is ascertained, the value of lifetime taxable gifts is added then the tax is computed. The available unified credit then reduces the tax. Most simple estates include cash, securities, small amounts of other easily valued assets and no special deductions or jointly held property) do not require the filing of an Estate Tax return. Ways to avoid or mitigate Estate Tax in the US include: – Buy life insurance and use the benefit to pay the tax – Move to a US State without Estate Taxes – Give money to people as Gifts – Set up an Irrevocable Life Insurance Trust (ILIT) – Set up a Charitable Trust – Set up a Donor Advised Fund Do Brits with US assets need to file Estate Tax returns? An executor for a non-resident of the US must file an Estate Tax return if the US-based assets exceed $60,000. US citizens are subject to US estate taxation about their worldwide assets even if they are not residents of the US. An Estate Tax return is required for a deceased US citizen if the FMV at the death of the decedent’s worldwide assets plus the value of the decedent’s adjusted taxable gifts exceeds the basic exclusion amount on the date of death. For further information, refer to Form 706.
