UK Inheritance tax (+offshore investments)

[JustAnotherNomad]

You wrote: "inheritance tax will be due on US ETF's to US also if value exceeds $60k" (by the way, you can completely avoid this by buying Ireland-domiciled ETF's instead)
I wrote: "Doesn't apply (or only to a much, much smaller degree) if you're tax resident in one of these countries" (including the UK)
I also quoted: "For decedents dying in 2021, this means that if the worldwide estate of the U.K. resident was valued at $11,700,000 or less at date of death, the U.S. estate tax would be zero"

Now you're writing: "US estate tax applies to UK residents for US assets. There is no if's or but's about it."
Not sure where I lost you, but you are wrong.

It's nothing out of the ordinary that there is local inheritance tax to be paid for nonresidents. If you own real estate in the UK, for example, there would also be UK inheritance tax to be paid when you die. Even if you never lived in the UK.
That is not the issue. The issue with US estate tax is that the tax-free exemption is $60k instead of the $11.7M that applies to US persons.
But as a UK person, you get the full US exemption. For a lot of people, this is good enough. And if your net worth is more than $11.7M, you'd be able to afford a proper structure that would avoid estate tax anyway.

And if you only want to hold ETF's, you can just buy Ireland-domiciled ones.

 

[Martin Everson]

You wrote: "inheritance tax will be due on US ETF's to US also if value exceeds $60k" (by the way, you can completely avoid this by buying Ireland-domiciled ETF's instead)

Yes I did say that. And holding stocks via Lux or IE ETF has always been the preferred method.

I wrote: "Doesn't apply (or only to a much, much smaller degree) if you're tax resident in one of these countries" (including the UK)
I also quoted: "For decedents dying in 2021, this means that if the worldwide estate of the U.K. resident was valued at $11,700,000 or less at date of death, the U.S. estate tax would be zero"

That allowance does not apply to non-US residents and domiciles. For non-residents it remains $60k.

That is not the issue. The issue with US estate tax is that the tax-free exemption is $60k instead of the $11.7M that applies to US persons.
But as a UK person, you get the full US exemption. For a lot of people, this is good enough. And if your net worth is more than $11.7M, you'd be able to afford a proper structure that would avoid estate tax anyway.

This applies to US domiciliaries. Non-US domciliaries are subject to estate tax at 40% and exemption on first $60k. You do not get the $11.7m exemption as a non US person that is for US persons.

Some Nonresidents with U.S. Assets Must File Estate Tax Returns | Internal Revenue Service

Some nonresident alien decedents with U.S. assets are required to file U.S. Estate Tax Returns.

www.irs.gov

Can you post your source again the link does not work any longer?

You got it totally wrong.

 

[JustAnotherNomad]

No, the treaty raises the exemption.
That should be common sense as the limit is NEVER $60k for US persons. So it would not make sense for an article to refer to higher limits if this was about US citizens/persons.
It would be completely pointless to sign estate tax treaties if the only benefits were foreign tax credits. Countries can, and usually do, offer those unilaterally.

Try the Wayback Machine:

U.S. Estate Tax and Residents of the United Kingdom · Kerkering, Barberio & Co., Certified Public Accountants Sarasota, FL

Many residents of the United Kingdom own property in Florida and in other parts of the United States. In the years past, the U.S. estate tax obligation on U.K. residents […]

web.archive.org

The tax treaty also literally states:

Where property may be taxed in the United States on the death of a United Kingdom national who was neither domiciled in nor a national of the United States and a claim is made under this paragraph, the tax imposed in the United States shall be limited to the amount of tax which would have been imposed had the decedent become domiciled in the United States immediately before his death, on the property which would in that event have been taxable.

Still don't believe me? Check Q7 here:

Estate tax treaties with some countries contain a 'pro rata unified credit' provision that generally raises the US estate tax exemption to the same level as provided to a US citizen. Countries with this provision are Australia, Canada, Finland, France, Germany, Greece, Italy, Japan and Switzerland. Countries with 'new' treaties that would generally also raise the US estate tax exemption are Austria, Denmark, Netherlands and UK. Ireland's treaty and South Africa's treaty are both 'old' and may not contain any provisions to raise the US estate tax exemption.

Some treaties have significant holes in them, for example Ireland's and South Africa's may not actually extend the full estate tax exemption for US citizens to Irish and South African investors, and Switzerland's may not protect from double estate-taxes.

In general then, the presence of a country in this list of US estate tax treaties is often just the first step in uncovering whether or not your country is fully protected from US estate taxes. You would need to research thoroughly to be sure that the answer to the question above is really yes. The US estate tax treaties with Canada and the UK are known 'good' treaties.

Non-US investor's guide to navigating US tax traps - Bogleheads

www.bogleheads.org

You're welcome.

 

[Martin Everson]

You are going round in circles and please don'ty mislead people with $11.7m which does not apply to non-US residents or domiciles.

If you live in UK with US assets you are subject to US IHT. You can use the UK/US treaty and pay UK's IHT to HMRC but that does not make you not subject to US IHT. To help you understand in simple terms with another example. If you buy a US situs stock you are subject to US withholding tax on dividends. Just because you can reduce it under treaty does not make you not subject to it. You are subject to US taxes. It takes some understanding for people who are slow but it makes sense once you do. In fact for IHT under the treaty if tax is not paid in UK see Article 5(5) then you are subject to tax in US...lol. This makes avoidance other than basic UK allowances impossible on paper as IHT is currently not enforced by US for foreigners......yet.

"(5) If by reason of the preceding paragraphs of this Article any property would be taxable only in one Contracting State and tax, though chargeable, is not paid (otherwise than as a result of a specific exemption, deduction, exclusion, credit or allowance) in that State, tax may be imposed by reference to that property in the other Contracting State notwithstanding those paragraphs."

Hopefully you can understand what being "subject to" means. Your very much welcome.

 

[JustAnotherNomad]

I never said you are not subject to estate tax.
I said that if you are a UK citizen (not a dual citizen, no green card holder) who is tax resident/domiciled in the UK and who owns US assets like US stocks worth $1M (significantly more than $60k). Then there is no US estate tax when you die because the estate tax threshold is much higher than $60k due to the estate tax treaty.
Yes, you will pay inheritance tax in the UK. But this is very different than if you were living in Spain, for example, a country that has also signed a tax treaty, but whose treaty does not cover estate tax. So if you were dying as a Spanish person in Spain instead, then the full US estate tax (40% on anything above $60k or so) would be charged. You might be able to get a credit for that in Spain, but as the US estate tax would probably far exceed the Spanish inheritance tax, you'd still be fucked.
So as a UK citizen living in the UK there's no harm in holding US assets >$60k (as you are paying the same inheritance tax as if you held non-US assets of the same value), whereas as a Spanish tax resident, it's a big risk.
That's why you can see in the flowchart from the article I linked to above, there's a node "A5" that recommends non-US persons to choose US-domiciled ETF's.

If you don't agree with that, then so be it. I have given lots of sources for people to do their own research if they feel like it, so hopefully someone else will find this useful.
We can leave it at that, but I'm so sure about this that I'd be willing to make a bet on this. I could send an inquiry to an accountant - winner pays for the consultation plus $100.

Maybe @Sols , @fshore or @khinkali have some input here as well.

 

[369]

@martin wouldn't a private family foundation be a solution ?

 

[Martin Everson]

@martin wouldn't a private family foundation be a solution ?

No as it would be inefficient if you have a dividend strategy. As depending on where the foundation is located which is typically offshore those countries do not have a DTA with US. Meaning that you get a 30% Withholding tax (WHT) applied on US dividends paid tothe foundation. You don't get the lower rate under DTA of between 10-15% (WHT). Then you have to look at UK tax treatment of a Foundation for a UK resident. For example I know for a UK settlor of an offshore Trust you pay income tax on the trusts assets as if they were your own. For a Foundation you need to seek proper tax advice. A better method is just to buy the Lux or IE domiciled ETF's and never directly buy US stocks or ETF's. Or better still stay away from all US investments like myself .


I am gonna be polite and say that anyone dealing with US assets should also seek professional tax advice when it comes to IHT. I again make clear that I am not giving any US tax advice whatsoever and simply debating the fine points. JustAnother is giving out wrong information based on his floored understanding of the rules visible in agreement and IRS website. I again say seek professional advice only when it comes to anything US and do not take any actions based on what he has said.

P.S I think I have been very polite in my handling of someone giving out misinformation . Now back to thread topic.

 

[JustAnotherNomad]

Obviously one should always seek qualified advice, as I've made clear time and time again. Not only when dealing with US assets.

Foundations/trusts are very typical vehicles for avoiding/reducing inheritance tax, but they are complex and you'd really want to work with a very experienced lawyer for that. If just one tiny detail isn't set up correctly, it can have huge tax implications.
And obviously nobody would be using them if there was no way to reduce WHT on US-sourced dividends to less than 30%.
Due to the complexity, they have high setup and maintenance costs though, so you'd need to have a certain level of net worth for such a structure to make sense.