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Inheritance Tax and Gifts

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A Look at the US Federal Gift Horse

Published on February 25, 2020

With the promise of Chancellor Rishi Sunak's Spring budget on March 11 comes the anticipation of possible changes to the UK Inheritance Tax (IHT) treatment of lifetime gifts. If implemented, these changes would create a sharper distinction with the US Federal Estate and Gift Tax (EGT). For American citizens living in the UK, now is the time to be fully aware of possible developments and make full use of the exemptions available in both jurisdictions as part of their estate plan.

Current position

At the time of writing, the UK has a 'wait and see' approach to IHT on lifetime gifts. A gift from an individual to another individual (as opposed to a trust) is not subject to IHT or an HM Revenue and Customs (HMRC) filing requirement when made. On death, the executors of a person's estate look back over the last seven years and count any gifts of capital made in that period which exceed the 'Nil Rate Band' threshold (currently £325,000) as part of the taxable estate to be reported to HMRC.

UK IHT is assessed according to a person's 'domicile', i.e. where their permanent home is determined, either due to fifteen out of twenty years of UK residency or under common law. Those with a UK domicile at the time of death are subject to IHT at 40% on the balance of their worldwide assets over the Nil Rate Band. For US citizens (and some Green Card holders) who are non-domiciled in the UK, only gifts of UK assets are counted for this purpose whereas they are within scope of US Estate and Gift Tax on their worldwide assets.

UK proposed changes

Following a recent report from the All-Party Parliamentary Group (APPG) on reforming IHT, some change is expected in the Budget to address the perceived unfairness of IHT. Among the suggested reforms the report suggests that some of the most useful IHT reliefs such as the disregard of gifts made before the seven years prior to death and the gifts from normal expenditure out of income are abolished. The current system would be replaced by one exemption of £30,000 in each tax year with an immediate tax liability of 10% on the balance, along with a reporting requirement. The Nil Rate Band would no longer apply to lifetime gifts. On death, the APPG proposes that the current 40% rate be reduced to 10% on taxable assets over the Nil Rate Band up to £2m with a 20% charge on the balance.

Opportunities for US citizens

Aside from an unlimited exemption for gifts to US citizen spouses, US EGT currently has a generous $11,580,000 lifetime allowance per individual along with a $15,000 annual exclusion for gifts. For those likely to remain in the UK long term, it is worthwhile considering making lifetime gifts of non-UK assets while still non-UK domiciled to keep these out of scope of UK IHT. The more generous lifetime allowance than that offered in the UK makes this worthwhile, especially if the APPG reforms are implemented and even after the $11,580,000 figure 'sunsets' in 2026 when it is scheduled to drop to circa $5,000,000. Seventeen states and the District of Columbia also have separate estate or inheritance taxes and Minnesota and Connecticut also have Gift Tax regimes so any state tax and filing consequences of gifting also need to be considered.

In addition, setting up an Excluded Property Trust (EPT) of your non-UK assets while still non-UK domiciled can ringfence those assets from UK IHT, even if you later become UK domiciled. The APPG report proposes that EPTs only maintain this protection from IHT if the settlor was resident for less than ten out of fifteen years at the time of the EPT set-up. While it should be noted that all, some or none of the APPG proposals may be implemented, all could have an impact for US citizens in the UK so now is the opportune time to take co-ordinated advice on your US/UK estate plan with suitable advisors on both sides of the pond.

Julie Jaggin is a Senior Associate in the Private Client team at Kingsley Napley LLP. She is also a member of the firm’s American services team and her practice often involves providing an overview of US estate-planning issues and co-ordinating advice and implementation work with US attorneys and accountants for clients within scope of US federal or state taxes.
T: +44 (0)20 3535 1734 | E: jjaggin@kingsleynapley.co.uk.

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