Some countries have estate tax treaties with the United States, including the United Kingdom. These treaties may change the default taxation rules that the United States or another country would apply to people who file tax returns in that country.
What Are Some Key Features of U.K. Estate and Trust Law?
People who are domiciled in the United Kingdom are subject to a tax called the inheritance tax on worldwide assets. This tax is paid by the estate, not by the people who receive the inheritance. It is assessed on worldwide assets. If you are not domiciled in the United Kingdom, then your estate only has to pay the inheritance tax on assets located in the United Kingdom or with a “situs” there.
The first £325,000 of someone’s estate is excluded from the United Kingdom’s inheritance tax. Since the tax rate is currently 40 percent, this exclusion is significant for many people. This exclusion is similar to the United States’ estate tax exemption. The U.K. also has a gift tax exclusion every year, but it is lower than the one available in the United States.
What Are the Major Features of the Treaty?
The United Kingdom-United States estate tax treaty, in effect since the 1970s and modified since then, determines which country taxes certain assets. It helps avoid double and excessive taxation for people who own property in both countries or who live in one country but are a citizen of the other.
Major features of the treaty include:
- People who are domiciled in one country cannot be taxed on property situated in the other country, except for immoveable property and permanent business property.
- A U.K. citizen is domiciled in the U.K. if he or she has not been a resident in the U.S. for income tax purposes in 7 out of the 10 previous tax years.
- A U.S. citizen is domiciled in the U.S. if he or she has not been a resident in the U.K. in 7 of the 10 previous years.
Essentially, estate tax imposed in each of the countries is limited for the most part to tax on property actually located in that country. However, the treaty includes many modifying rules as well.
What Is the Takeaway for People Planning Their Estates?
This treaty may sound very complicated if you are just trying to put an estate plan into place. Your takeaway should be that cross-border estates need more involved estate planning, and failing to plan can be extremely costly. Talk to an experienced lawyer familiar with estate tax treaties for legal advice.
Planning your estate? Look to Janet Brewer, Esq. for thorough and thoughtful estate planning advice. Janet’s more than 20 years of legal experience will give you confidence and peace of mind. To schedule a “Get Acquainted” meeting, visit Janet's website or call her office at (650) 469-8206.