U.K.-U.S. Inheritance Tax Planning- Estate Tax Treaty Strategies

U.K.- U.S. Inheritance Tax Planning  starts with your family needs versus saving taxes.   For example,  if you want to preserve your wealth for both your children and great grandchildren, you want a trust that can last for one hundreds years or more.

Such a trust requires a corporate trustee (such as a bank) versus an individual.  The corporate trustee must be a licensed financial institution that you believe will stay in business for 100 years.

The terms of the trust are more complex when the beneficiaries include next generation or generations.  We have seen that children start to demonstrate the real personality and behavior when they become teenagers.  As we watch our children become young adults, we finally learn their long term characteristics.

Because our needs change, we need a trust that we can change.  However, the United Kingdom and the United States inheritance tax and estate tax laws have restrictions on the trust amendments.  The solution is found with the use of an “amendment committee” that satisfies both Inland Revenue and the Internal Revenue Service. 

With your needs and goals in mind, your tax planners will start to draft your trust agreement.  The favorable provisions of the tax treaty provide the framework for your trust. 

One of the biggest international tax planning mistakes, that I have seen in my 40 years of experience, is the client hiring one firm for both the United States and the United Kingdom.

The old saying “Jack of all trades, master of none” applies to international tax planning.

The Best Tax Treaty for Inheritance and Estate Planning is the U.K.-U.S. Tax Treaty

One of my favorite cross border U.K.-U.S. tax plans is found in the tax treaty.  This allows the ownership of a home in the U.S. to avoid the complexity of the “Foreign Investors Real Property Tax Act” (FIRPTA).  Here is what I like:

Ian and Elizabeth are U.K. citizens and domiciles. They own a home in California. Assuming that Ian dies first, his will can provide that the home is inherited by his Elizabeth.  Under the tax treaty,  the U.S. will not charge an estate tax.  Plus, the cost of income taxes is now the market value of the home.

If Elizabeth sells the home after the death of Ian, she will avoid U.S. and California income tax on the appreciation in the value of the home.  The UK-US tax treaty overrides FIRPTA.

The link to the treaty is below.  If you would like a tax planning study then please contact me at [email protected]

  1. UK-US Gift Tax Treaty and UK-US Inheritance Tax Treaty
  2. An article on U.S estate tax for the non-citizen

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