US Estate Tax and UK Inheritance Tax Planning


What do you need to consider when migrating to the US or UK?

You may choose to live abroad in the United States (US) or un the United Kingdom (UK). There may be many reasons why you wish to live in the US or in the UK:

– Employment opportunities

– Desire to look at a new country (a new adventure)

– You have found romance and your loved one is overseas

– A business or investment opportunity

Whatever reason there is a great deal of emotion that comes into play. One of the factors that are overlooked is Estate and Inheritance Tax planning.

The IRS calls this Estate and Gift Tax and HMRC call it Inheritance tax. Whatever the terminology you need to be mindful that Estate/gift and inheritance tax needs to be paid on the excess value as described below.

It is vitally important that you understand the two pieces of tax legislation and how it may affect the wealth that you wish to pass onto loved ones down the road.

US Estate Tax by the IRS

Estate Tax is due to the IRS in the United States when someone dies and their net assets exceed $11,580,000. The amount of estate and gift tax that is charged on someone assets is tapered as follows:

10% – $0 to $10,000

20% – $10,001 to $20,000

22% – $20,001 to $40,000

24% – $40,001 to $60,000

26% – $60,0001 to $80,000

28% – £80,001 to $100,000

30% – £100,001 to $150,000

32% – $150,001 to $250,000

34% – $250,000 to $500,000

37% – $500,001 to $750,000

39% – $750,001 top $1m

40% – $1m+

Married couple are charged when the net assets exceed $23,160,000. The above-tapered amounts are also doubled for the estate and gift tax to be applied.

The following deductions may also be made before computing the Estate Tax that is paid over to the IRS

– Funeral expenses, administration expenses, and claims against the estate

– Certain charitable contributions

– Certain items of property left to the surviving spouse

– Beginning in 2005, inheritance or estate taxes paid to states or the District of Columbia

Estate Tax rates for non-US citizens

Non-US persons are entitled to an estate tax unified credit which shelters the first $60,000 of US situs assets from estate tax on death. As you can see that the IRS are not as generous for non-US citizens as they are US Citizens.

Make gifts to loved ones to reduce US death Tax

It is possible to make gifts of $15,000 per annum to reduce estate tax to loved ones. This $15,000 gift of assets will reduce your overall estate value that is then subject to estate tax. There is a $157,000 annual exemption for gifts from a US citizen spouse to a non-US citizen spouse. Gifts above annual exemptions will reduce the lifetime allowance to the extent that the annual exemption is exceeded

Gifts to non US residents

There is also a $152,000 exclusion when you make a gift to non-US resident individuals.

How do you file US Estate Tax obligations to the IRS?

Filing for US Citizens / Residents

The IRS Estate tax 706 form is completed to inform the IRS of the amount of estate and gift tax to be paid over. Estate and Gift tax may be paid to the IRS using the online portal called “Electronic Federal Tax Payment System” or EFTPS for short.

Filing for non-US Citizens / non-residents

The IRS Estate tax 706a form is completed to inform the IRS of the amount of estate and gift tax to be paid over. Estate and Gift tax may be paid to the IRS using the online portal called “Electronic Federal Tax Payment System” or EFTPS for short.

UK Inheritance Tax by HMRC

You may look at the above and feel that the IRS and pretty generous when it comes to the value of assets that is not subject to Estate and Gift Tax. You would be right, especially when you consider the amount of tax that is applied to people that are domiciled in the UK.

HMRC Inheritance Tax is applied at the rate of 40% in excess of a single person rate of £325,000.

From 6th April 2017, an individual can potentially claim a further tax-free allowance, known as the residence nil-rate band (RNRB). The allowance will start at £100,000, rising to £125,000 in 2018, £150,000 in 2019 and £175,000 by 2020, thereby giving a couple an additional £350,000.

For example, if £1M worth of assets was left in a will then £350,000 would be subject to 40% IHT being £140,000. Assets may need to be sold to pay the IHT liability.

Make gifts to loved ones to reduce UK Inheritance Tax

Once more it is proven time and time again that HMRC is not as generous as the IRS when it comes to tax reduction. The IRS provide you with an annual gift allowance of $15,000 compared to the UK annual IHT gift allowance of £3,000.

There are other allowances that HMRC provide to UK tax-payers, which include:

– wedding or civil ceremony gifts of up to £1,000 per person (£2,500 for a grandchild or great-grandchild, £5,000 for a child)

– normal gifts out of your income, for example Christmas or birthday presents – you must be able to maintain your standard of living after making the gift

– payments to help with another person’s living costs, such as an elderly relative or a child under 18

– gifts to charities and political parties

How do you file UK Inheritance Tax obligations to HMRC?

Once you have understood the UK inheritance tax liabilities you will need to complete the HMRC form IHT100.

US death Tax compared to UK death Tax

US IRS Estate Tax compared to the UK HMRC Inheritance Tax

The US and UK will tax you on the assets that you have in the country where they are placed If you have a home in the US, it will be taxed first under the IRS estate tax. You will then be taxed under the UK Inheritance Tax rules but will receive a credit for the tax already sufferers.

The reverse applied if you have assets in the UK. It will be taxed first in the UK by HMRC. The IRS will then tax the estate but you will receive full credit as you will pay more Inheritance Tax.

It is clear to see that the IRS are much more generous when it comes to tax free assets not being taxed at all. It is important that you seriously consider where you will lay your hat in retirement.

I have spoken with many US citizens that suggested that would leave the US to live in rainy UK. They are quickly put off when they realise that they will be significantly more taxed in the UK than the US.

The domicile trap

It is important to note that the word domicile means: is the status or attribution of being a lawful permanent resident in a particular jurisdiction. A person can remain domiciled in a jurisdiction even after he has left it. If he has maintained sufficient links with that jurisdiction or has not displayed an intention to leave permanently (i.e. if that person has moved to a different state but has not yet formed an intention to remain there indefinitely).

Since domicile status depends on a person’s intent to make the US their permanent home, all relevant facts and circumstances will be considered by a US court trying to determine an individual’s domicile (e.g. green card status, location of assets and principal residence, where the individual is registered to vote, where their driving license was issued, and so on).

Wherever you are deemed domiciled you will be typically subject to Estate Tax or Inheritance Tax on your worldwide assets. If you are UK domiciled then you are subject to IHT in worldwide assets but only subject to Estate Tax on US-based assets. The roles apply in reverse if you are a US domiciled individual.

Better to be US-domiciled than UK domiciled

For all the reasons outlined above it is much better to be domiciled in the US than it is the UK. Clearly, we are talking about Estate and Inheritance tax planning. I appreciate that life is not about tax. That said there are a lot of one dollar reasons to stay and live in the US than the UK.

It is not enough to be resident in the US either. You will need to find ways of being a US resident. This requires you to get citizenship (green card). Only then can you to benefit from the generous Death Tax exemption.


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