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UK Inheritance Tax Planning

If you are UK connected, but residing in the USA, it’s only natural that the cross-border intricacies of UK & US UK inheritance tax isn’t near the top of your list of wealth planning priorities.  However, ignoring your liabilities could prove to be very costly.

By managing the assets within your estate now, you can mitigate your UK inheritance tax liability and know that plans are in place for your wealth to be managed and distributed in accordance with your wishes and fulfil your legal obligations.

The current UK inheritance tax limit, (also known as the Nil Rate Band, NRB) is £325,000 per individual and inheritance tax is typically payable when the surviving spouse dies. Each year approximately 24,500 estates are required to pay U.K Inheritance tax.

Understanding Trusts – There are many ways trusts can help you mitigate paying UK inheritance tax

Chargeable Lifetime Transfer

Placing assets into trust when resident and domiciled in the UK is classified as a Chargeable Lifetime Transfer (CLT) and is taxable at 20% on all assets over the NRB. When you are non-domiciled assets, non-UK situated assets placed in trust are not considered to be a CLT.

US Assets

Placing some or all of your U.S. assets/property in trust and having a team in place to ensure continued compliance can alleviate the extent of U.K. Inheritance Tax that your beneficiaries would have to pay.

Investment Growth

After you place funds into a trust and return to the U.K. every 10 years the trust will have to pay periodic charges at 6% of the net asset value within the trust. Investments in trusts are permitted, and over a long-time frame, investment growth would typically the original capital invested.

An Expat’s Guide To What You Need To Know Before Returning To The U.K.

When you have worked hard all your life to create personal wealth or build assets, it's important to know that this will be appropriately distributed after you are gone. UK inheritance tax and estate planning allows your family and loved ones to benefit from your hard work by structuring your financial affairs in the most efficient manner.

As part of our UK inheritance tax review service, we coordinate with what we believe are some of the best Legal, Tax & Trust providers to ensure that you have the best team to hand to prepare your future return to the UK.

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Why choose GWM USA?

At GWM USA we know that making a decision on how to deal with UK Inheritance Tax can be daunting, which is why our team of experienced Advisors are on hand to help you answer the questions most British internationals are asking.

All of our advisors are US licensed Advisory Representatives, meaning they are well placed to advise in all areas of personal financial planning.

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Inheritance Tax FAQ’S

What is a domicile and how does this affect my estate planning?

A domicile in simple terms is the specific country that is considered to be that individual’s home. This affects your estate planning especially if you establish a domicile of choice. A domicile of choice is much like it sounds, although you have a home you may elect our of your own free will to live in another country. When you do this you assume a domicile of choice in that country. A domicile affects your estate planning because it is your domicile that determines in which jurisdictions you are subject to estate/inheritance tax.

What is the IGA between the UK & USA and why does it matter to me?

In 1978 the U.K. & U.S. signed an agreement which was ratified in 1980 in a convention between each respective governments on Estate & Gift Tax. The convention dictates in which scenario an individual is domiciled in each respective country under certain parameters. The agreement has a general principal where if an individual is deemed to be domiciled at death in one state but also has a connection to the other state a ruling as per the treaty is necessary. There are instances where either taxing states will assume domicile over the other so it is important to understand and consider professional advice to ensure that you are planning your estate planning needs in consideration of the IGA. Where you are a dual citizen of the U.S. & U.K. this brings into additional complexities that require legal advice.

How long am I a UK domicile for IHT purposes?

Planning for the U.K. IHT regime must continue for the first four years of residence in the U.S. as under the treaty and under the 17/20 rule you would be considered a U.K. domicile at death and liable to U.K. IHT. It is important to revisit your situation if in any of the subsequent years you are deemed a tax resident of the U.K. as per the statutory residence test and then reassume your domicile of choice in the U.S. Short term protection products may be suitable for you if your estate is in excess of the nil rate band (£325k or £650K for married couples). Bespoke arrangements can be considered for mixed/non-domiciled clientele. Retaining your primary residence in the U.K. may be suitable in certain circumstances to take advantage of the Residential Nil Rate Band (RNRB) which uplifts the Nil Rate Band (NRB). The consensus is that RNRB is eligible in respect of property previously owned and lived in, even if that property that is currently rented out to generate income. After this four year period, most individuals will fall under the U.S. estate tax regime which has much higher thresholds before being subjected to IHT.

What is the difference between domicile and domicile of origin?

The U.K. has a rather antiquated process when it comes to legal definitions. Although you may elect a domicile of choice, you may never shred your connection to the U.K. if you were born in the U.K. as you have a Domicile of Origin. Even if you were only in the U.K. whilst you were a baby you may never erase this fact. If an individual has a Domicile of Origin and leaves the U.K. under U.K. law they are considered to be formerly domiciled in the U.K. this status is known as a “Formerly Domiciled Resident” or FDR. The issue of this, is if a FDR were ever to repatriate back to the U.K., the U.K. would typically want to assume the taxing rights (domicile) at death regardless of where they lived throughout their lives. This is why it is imperative that planning for your return to the U.K. should be made when you are not domiciled.

What is a “mixed domicile couple” and what are the unique opportunities for these couples?

A mixed domicile couple is very simple. It is a couple that has 2 different domiciles of origin. (i.e. a husband who was born in the U.K. and a wife born in the U.S). If a mixed domicile couple is planning to return to the U.K. the couple can shelter non-U.K. assets in trust and may still benefit from these assets within their lifetimes free from the U.K. IHT regime.

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