How Brits avoid Inheritance Tax in the United States

Simon Misiewicz

Simon Misiewicz

Expat & Property Tax Specialist

25th January 2022

How Brits avoid Inheritance Tax in the United States

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.

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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.

Need to apply for an ITIN?

Our Certified Acceptance Agents can help you obtain an ITIN. We will need to meet face to face at our Nottingham office or your place of work/home

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Which assets are subject to US Estate Tax, payable to the IRS? 

US domiciliaries are taxed on the value of their worldwide assets at death in the same way as US citizens.

Non-US domiciliaries are taxed only on the value of their US-based assets.

These assets typically include real and tangible personal property based in the US, business assets located in the US, and stock of US corporations.

The definitions of US-based assets may be modified by an applicable Estate and Gift Tax Treaty.

Estate Tax treaties between the US and UK often provide more favourable tax treatment to non-residents by limiting the type of asset considered situated in the US and subject to US Estate Tax.

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.

US & UK Tax return Services (Joined up thinking)

Fed up using an American CPA or EA in one firm to file your 1040 tax return and a UK based accountant to file your UK tax return?

Optimise accountants hires both UK qualified tax accountants and US qualified tax accountants under the same roof to help you streamline your international expat tax affairs.

Learn more about our services

What is Generation-Skipping Transfer Tax?

Generation-Skipping Transfer Tax (GST Tax) is imposed in addition to Estate Tax or Gift Tax.

It is imposed on US taxable gifts and bequests made to or for the benefit of persons who are two or more generations below that of the donor, such as a grandchild.

It is also imposed on gifts made to donees unrelated to the donor and 37.5 years younger than the donor.

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.

Free Online Tax Courses

Want to save tax in the future?

We have now created free online tac courses to help you build wealth whilst paying less tax. Learn today and save tax tomorrow. We have covered the basics of tax filing with HMRC and IRS. We have created courses on advanced planning strategies that will save you tax in the future.

We have training programmes for UK tax and US tax. Learn today and save tax tomorrow

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Are Brits in the United States liable to pay gift taxes?

There is a tax treaty between the US and UK designed to eliminate double taxation.

Diligence is still required, especially where there is a mismatch between the US and UK rules.

The IRS taxes its citizens and residents on worldwide income, as defined by the US tax rules.

In practice, Brits may be used to certain tax benefits, exemptions, or exclusions in the UK that will not necessarily be applicable for US tax purposes.

The US is not obliged to recognise the tax-free status of ISAs, capital gains exemptions on the sale of homes, the benefits of premium bonds, or gambling wins.

Brits and their families are potentially subject to US taxes, including state and local taxes, once they establish residence in the US.

Since Estate Tax is levied on an individual’s assets and estate after death, it can be avoided if you gift assets before you die.

Gift Tax applies to assets given away more than certain limits while the taxpayer is alive.

The IRS considers that Gift Tax applies whether the donor meant the transfer as a gift or not.

There are gift exclusions available. For the 2022 tax year, the annual exclusion is $16,000. This means that tax filers can give up to £16,000 to each person they wish without paying Gift Tax on any of those gifts.

And they may offer gifts up to the value of the gift exclusion amount year after year without incurring tax.

These provisions make gifting an effective way to avoid tax on assets transferred to people, such as non-family members, who might be subject to Estate Tax if the assets were transferred as part of an estate.

If your gifts exceed the gift exclusion limit, they aren’t subject to tax immediately.

They may never be taxed unless your estate is substantial.

The amount above the gift limit is noted and added to the taxable value of your estate when calculating Estate Tax after you die.

Need to apply for an ITIN?

Our Certified Acceptance Agents can help you obtain an ITIN. We will need to meet face to face at our Nottingham office or your place of work/home

Learn more about our services

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

US & UK Tax return Services (Joined up thinking)

Fed up using an American CPA or EA in one firm to file your 1040 tax return and a UK based accountant to file your UK tax return?

Optimise accountants hires both UK qualified tax accountants and US qualified tax accountants under the same roof to help you streamline your international expat tax affairs.

Learn more about our services

Are British ex-pats in the US liable to pay UK Inheritance Tax? 

If your permanent home is abroad, Inheritance Tax is only paid on your UK-based assets. Anyone from the UK domiciled would have to pay UK Inheritance Tax (IHT) on their worldwide assets.

This could include property or bank accounts that you have in the UK.

It’s not paid on excluded assets like foreign currency accounts with a bank or the Post Office or overseas pensions.

Inheritance Tax is a tax on the estate (property, money and possessions) of somebody who has died. There is usually no Inheritance Tax to pay if the value of your estate in the UK is below the £325,000 threshold per individual.

Some gifts and property are exempt from Inheritance Tax in the UK, such as wedding gifts and charitable donations.

Tax relief might also be available on certain property types, such as farms and business assets.

Transfers from a UK-domiciled spouse to their UK-domiciled spouse are exempt from UK Inheritance Tax.

If an individual’s entire estate is left to their spouse, it is possible to transfer unused nil-rate band to the second spouse.

This means that on the death of the second spouse, two nil-rate bands (£650,000) or up to £1 million if you are entitled to the additional nil-rate band.

Where spouses have differing domiciles and one is a UK domicile, the absolute exemption for spouse-to-spouse transfers will not apply for transfers made by the UK-domiciled spouse to the non-UK domiciled spouse.

The exemption is instead limited to £325,000 in addition to the £325,000 nil-rate band.

The recipient does not pay tax on inherited assets when it is inherited.

You may need to pay Income Tax on the profit you later earn from your inheritance, such as dividends from shares or rental income from a property.

Capital Gains Tax may be due later if you sell shares or a property you inherited.

Free Online Tax Courses

Want to save tax in the future?

We have now created free online tac courses to help you build wealth whilst paying less tax. Learn today and save tax tomorrow. We have covered the basics of tax filing with HMRC and IRS. We have created courses on advanced planning strategies that will save you tax in the future.

We have training programmes for UK tax and US tax. Learn today and save tax tomorrow

Free online tax course

Free – Access NOW!!

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.

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