Penelope Williams explains a 'once-in-a-generation' tax opportunity for UK-domiciled Americans

The 2010 Tax Relief Act provides Americans across the world with a rare opportunity to pass their hard earned money to loved ones and future generations and not the IRS.

Anyone who is a citizen or domiciled in the United States can currently give on transfer assets up to US$5.12m free of federal transfer tax to family members or trusts - and a married US couple can pass up to US$10.24m, with gifts in excess of this amount taxed at the current low 35 per cent federal transfer tax rate.

However, the window of opportunity for this gift tax exemption closes on 31 December - and will be replaced by a flat US$1m gift tax exemption and 55 per cent federal transfer tax rate unless Congress passes new law.

Fast acting

Many of the 190,000 American citizens living in the UK will be able to take advantage of this opportunity - but will have to act fast.

For the next three months, US citizens and those domiciled in the US can gift significant assets - whether cash, property, businesses or even art and other non-traditional assets - free of US tax.

The situation is slightly more complex for Americans living in the UK because UK tax rules have to be considered. For example, while a trust will save US federal transfer taxes, it could trigger a large UK inheritance tax charge if created by someone domiciled or deemed domiciled in the UK.

Similarly, gifts of appreciated assets can trigger UK capital gains tax so care is needed.

The opportunity is not just for people worth more than US$5m - those with less wealth will also reap great benefits from this. Many Americans are adopting a ‘wait-and-see’ approach just in case the window of opportunity is extended after the Presidential election, but there’s a strong possibility those people will miss out.

Americans should take advantage of this opportunity now, before it’s too late.

Top eight tips for Americans who have lived in the UK for more than 17 years

 

1. Consider Family Limited Partnerships.

Remember that there are a number of options for those wishing to pass on wealth to future generations, some better-known than others. Family Limited Partnerships provide a tax-efficient option for those who want the succession benefits of a trust, but who would otherwise be hit with a UK inheritance tax charge on the creation of a trust.

2. Outright gifts for those who do not need to worry about additional control.

Handing over an asset completely to your children might not be the best option for everyone but it provides offers the benefit of simplicity for those not concerned with continuing control or asset protection.

3. Cancel loans or other receivables from family members.

If you have ever made a loan to anyone in your family – for example, if you have lent your children some money to help with a house deposit – cancelling these loans could be a simple way of reducing the value of your estate without materially impacting your real asset position.

4. If you plan to give up US citizenship - use the gift tax exemption to minimise exit tax liabilities.

If you are considering settling in the UK or elsewhere for good, now might be the perfect opportunity to undertake some advance tax planning. An ‘exit’ tax is applied when a ‘covered expatriate’ gives up US citizenship or relinquishes their green card - but a person with assets valued under US$2m generally is not considered a covered expatriate.

People who are considering expatriating from the US and who have assets of US$2m or more should therefore consider making gifts to reduce the value of their assets below this exit tax threshold.”

5. Create an excluded property trust as an asset preservation vehicle.

For people not yet deemed domiciled in the UK, an excluded property trust can provide an appropriate asset preservation vehicle, sheltering assets from US estate tax and UK inheritance tax.

6. Use the benefits of being in a couple.

Despite the economic downturn, the London property market is still holding up well. If your family home in London (which is likely to have appreciated in value since acquisition) is co-owned by, say, a US husband and a UK wife, the husband could consider gifting all or part of his interest in the UK house to the wife to avoid US income tax on the gain that would otherwise be taxable on a future sale of the property.

Gifts from a US spouse to a non-US citizen spouse are only exempt from US gift tax within certain low limits. This planning avoids future income tax by utilising all or a portion of the current US$5m lifetime gift tax exemption.

7. If using US funds to buy a non US home, gift the money or consider an interspousal loan.

Again, this route avoids future US income tax on the sale of the property by taking advantage of the $5m gift tax exemption or making an interspousal loan, which can be interest-free.

8. Rebase your asset values ahead of US profit and capital gains tax rate changes.

The rate at which the US taxes profit and capital gains are also due to increase from 1 January. US citizens should be thinking about rebasing assets at the lower tax rates - but need to take care to avoid triggering a non-creditable tax charge in another jurisdiction.

There is a broader range of options for US citizens who have been in the UK for a shorter period of time. They should be just as aware of the opportunities available to them.

Penelope Williams is a partner at Withers www.withersworldwide.com