You are an American in the UK. You have not quite been cured of your American accent (your British spouse is working on this), but you have been in the UK long enough to be almost British at heart. Or at least this is how the UK tax system treats you after fifteen years of continuous tax residence in the UK. You vehemently object to this being the case. In protest, in the months before you become deemed UK domiciled, you create an excluded property trust and fund it with your non-UK sited assets, before waving mischievously at the taxman.
Flippancy aside, succession planning for dual UK/US linked individuals requires careful consideration, and not a small degree of sophistication, to ensure that such planning is effective in achieving its objectives in both jurisdictions.
From a UK tax perspective, an excluded property trust created at a time when the settlor is neither actually, nor deemed, domiciled in the UK ensures that the value of the trust fund is protected from inheritance tax (“IHT”), both within the trust and in the settlor’s estate. This beneficial treatment continues, including after the settlor becomes deemed UK domiciled, provided there are no additions to the trust fund.
From a US estate and gift tax perspective, however, a US citizen and domiciliary remains within the scope of US taxation, including as a matter of the allocation of taxing rights under the US-UK double tax treaty (save in relation to UK property). This is subject to the availability of the settlor’s estate and gift tax allowance, which at $10 million adjusted for inflation (i.e. $12.6 million in 2022) is not an un-generous amount. There is, however, a catch – it is due to “sunset” and fix at half that amount from 1 January 2026.
In an attempt to lock-in the heightened estate and gift tax allowance currently in place and prompted by US Treasury Regulations issued in 2019 assuring taxpayers that there will be no clawback for completed gifts where the donor dies at a time when the estate and gift tax allowance has reverted to the lower amount, US individuals were advised to use or lose their allowance. Many acted upon that advice, pouring their assets into lifetime trusts, with or without the ability to access settled funds in the future.
Fast-forward to April 2022, when the US Treasury announced proposals to enact further regulations – by way of exclusion from the anti-clawback special rule introduced earlier. Under these proposals and contrary to earlier general assurances, it now appears that certain “included gifts” (including into trust), in relation to which the donor has reserved the ability to access the gifted funds in the future, will only benefit from the estate and gift allowance applicable at the time of the donor’s death. This could lead to significant, unanticipated charges for affected estates.
While the majority of lifetime gifts into excluded property trusts for IHT purposes should not fall foul of this proposed exclusion if enacted in its current form, there may be situations where an unexpected tax charge arises in the US notwithstanding the absence of reserved powers or other similar features; gifts into trust of entity interests where the transferor retains voting rights or management powers in relation to such entity may be one example.
This emphasises not only the complexity and unpredictability of what may understandably be regarded as an ever-changing goal-post; but above all, it highlights the need for timely and proactive specialist advice on both sides of the Atlantic, to ensure critical detail and any window of opportunity is not lost “in the Pond”.