Iain Younger, a director at tax experts Frank Hirth, explains the complexities of gifting opportunities for people with connections to the US and UK
Much of our client base is made up of US citizens who are long-term residents in the UK, which brings significant tax exposure in both countries.
This is relevant when considering income taxes, but also when looking at succession planning. The current global situation has brought estate planning to the top of many people’s agendas. Such planning is specific to each individual’s circumstances and goals.
The approach can be broken down into three parts:
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1. What has been done previously?
The overall goals of a family can, and do, change, and it is important that any planning considers the need for future flexibility. However, it will need to bear reference to what has been put in place previously. Typical questions we ask clients include:
- Does the purpose of structures put in place (trusts etc) still serve their original purpose?
- l Has your beneficiary base changed?
- Is the intended destination of your wealth still appropriate?
Understanding previous use of exemptions etc is essential to understand the opportunities.
2. What are the current opportunities?
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US citizens deemed to be domiciled in the UK need to consider both US federal gift & estate tax and UK inheritance tax, which operate in significantly different ways.
Currently, a US citizen has a unified gift & estate tax exemption of $11.58 million (annually adjusted for inflation). If no previous gifts have been made, a US citizen can make qualifying gifts of $11.58 million (more than $23 million for a married couple) without incurring any gift tax charges.
However, the exemption used during lifetime is not available at death. Contrast this with the UK, which allows for an unlimited value of gift to pass to any individual to fall out of any IHT charge if the donor survives seven years.
The mantra of ‘dual qualifying’ is essential when looking at the US and UK position. Available reliefs to consider include:
- Transfers between spouses are exempt in both the US and UK if both spouses are US citizens and of the same domicile status in the UK.
- A charitable exemption is available in both countries for ‘qualifying’ contributions. This can be assisted via the use of a donor advised fund.
- The size of the US exemption also allows for relief to be taken through UK-only exemptions without prejudicing the US position. When considering a gifting strategy, the available assets and the process of gifting must be considered.
For US purposes, the gifting of appreciated assets can be effective, as this is not a deemed disposal. The position is not mirrored in the UK, where generally a gift is considered a deemed disposal of the asset, which could crystallise an immediate capital gains tax charge (subject to any available holdover reliefs).
This mismatch could be an issue if the recipient is US-exposed, as any future gain on disposal (determined under US principles) would essentially include the same gain previously recognised in the UK, without relief for the UK taxes suffered at that point. Overall, this is double taxation.
3. What does the future hold?
The future of US gift & estate tax and inheritance tax is more uncertain than ever. The US exemption is in force until 1 January 2026, when it is scheduled to return to the 2017 exemption levels ($5 million adjusted for inflation).
However, the result of the November 2020 election will affect this, and a Biden win would almost certainly see an earlier reduction in the available exemption.
In the UK, inheritance tax has been the subject of discussion for some time, and earlier this year the All-Party Parliamentary Group on Inheritance and Intergenerational Fairness produced their report in respect of a complete overhaul of the inheritance tax system.
It is likely that there will be further changes in the US and UK, but what those changes will be remains unclear and we would encourage a review of succession planning now to allow a level of certainty as to the tax position of any plans implemented.
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