If you are a US citizen and are also domiciled or deemed domiciled in the UK, you face the prospect (under current rules) of both US estate tax and UK inheritance tax (IHT) on your worldwide assets - and there is, unfortunately, no magic wand. However, if you are not a UK national, the US/UK Estate and Gift Tax Treaty (the "Treaty") could provide a partial answer and a planning opportunity.
Relief under the Treaty – taxing rights
If you:
- are a US citizen and have been resident in the US at any time in the last three years, and
- are domiciled or deemed domiciled in the UK
you will be 'domiciled' in both the US and the UK for the purposes of the Treaty. In this case, the 'tie-breaker' provisions in the Treaty will determine in which country you are treated as 'treaty domiciled' - that is, which country will have primary taxing rights.
Broadly, under the 'tie-breaker' provisions, if you are a US citizen but not a UK national and have not been resident (for income tax purposes) in the UK in seven of the last ten years you will be 'treaty domiciled' in the US and able to benefit from specific provisions of the Treaty. In particular, your exposure to UK IHT will be limited to UK real estate and any 'business property' of a UK permanent establishment. Whereas, if you are US 'treaty domiciled' but are a UK national, the UK retains taxing rights in relation to all your UK property.
There is potentially an additional tax planning route available to those US 'treaty domiciled' individuals who are not UK nationals, which should not be overlooked.
'Treaty protected' trusts
If you fall within this category, you may be able to further shield assets from UK IHT by settling a 'treaty protected trust'. The Treaty provides that UK IHT shall not be imposed on property comprised in a trust if, at the time the trust was settled, the settlor was 'treaty domiciled' in the US and was not a UK national.
Therefore, US 'treaty domiciled' individuals who are not UK nationals may consider setting up a 'treaty protected trust' to protect assets held within the trust from IHT. Some individuals may even consider renouncing their UK nationality to take advantage of the Treaty provision, although the pros and cons of renouncing UK nationality should be considered in detail before doing so.
Interaction with proposed new IHT regime
The UK's so-called 'non-dom' tax regime is about to undergo significant changes, expected to take effect from 6 April 2025. Under the proposals, liability to UK IHT will no longer be determined by an individual's domicile status but will depend on their residence; broadly, anyone who has been resident in the UK for 10 years will be subject to IHT on their worldwide assets and will remain so for 10 years after leaving the UK. Of particular relevance, is that the IHT position of assets settled in trust (whenever settled) will no longer be determined by the domicile status of the settlor at the time the assets were settled, but will, likely, depend on the residence status of the settlor at the time of the relevant IHT charge (or on death where the settlor's is deceased).
How will the Treaty provisions interact with the new UK IHT regime? Will assets in 'treaty protected trusts' remain outside the scope of UK IHT? Currently, we do not have clarity on these issues - the Treaty provisions are 'domicile' based, and it is not clear how they will sit alongside the proposed new 'residence' based IHT system.
It may be that the UK government proposes amendments to UK legislation in an attempt to unilaterally replace the concept of domicile in the treaty with a residence-based test or remove the concept of 'treaty-protected trusts' and provide for any such trusts to be treated in the same way as all other trusts. In this case, the advantages of a 'treaty-protected trust' may only apply before the settlor reaches 10 years of UK residence.
Alternatively, it may be that any amendment to the Treaty – to remove the concept of 'treaty protected trusts' - would only be possible through re-negotiation of the Treaty. If this is the case, the UK IHT protection for 'treaty protected trusts' as we know it may be here to stay for the medium-long term.
How can we help?
Our Private Wealth team has extensive experience advising international clients, including those with US-UK connections, on their tax, international wealth, and succession planning. To learn more about how we can help, please contact a member of our team.
