Inheritance Tax Planning for Families with US and UK Property

Proactive planning is essential to reduce inheritance tax liabilities and protect family wealth. Here are some strategies for families with property in both the US and UK:

Utilize Tax Reliefs and Exemptions

Taking advantage of available exemptions and reliefs in both countries can significantly reduce the inheritance tax burden:

• US Lifetime Gift Tax Exemption: The US allows individuals to make lifetime gifts up to a certain amount without incurring gift tax. For 2024, the lifetime gift and estate tax exemption is $12.92 million. Gifting assets during one’s lifetime can help reduce the taxable estate.
• UK Nil-Rate Bands and Reliefs: Using the nil-rate band, residence nil-rate band, and other reliefs can help minimize UK inheritance tax. Transferring business or agricultural property may qualify for reliefs that reduce the taxable value of the estate.

Establish Trusts

Trusts can be a powerful tool for inheritance tax planning, providing control over asset distribution while potentially reducing tax liabilities:

• US Trusts: Setting up a trust in the US can help keep assets out of the taxable estate. Grantor trusts, irrevocable life insurance trusts, and charitable remainder trusts are commonly used for tax planning.
• UK Trusts: Trusts can help minimize inheritance tax in the UK by reducing the value of an estate subject to tax. However, the UK imposes its own rules on trust taxation, so careful structuring is necessary to avoid unexpected tax liabilities.

Consider Domicile and Residency Status

Managing domicile and residency status can help optimize inheritance tax planning:

• Change of Domicile: For individuals living abroad who do not wish to be considered domiciled in the UK for tax purposes, taking steps to establish domicile elsewhere can reduce exposure to UK inheritance tax.
• US Estate Tax Planning for Non-Residents: Non-residents with US-situs assets can use planning techniques like holding property through a foreign corporation or trust to reduce estate tax exposure.

Marital Planning

For families with mixed US-UK citizenship, marital planning can help reduce the tax impact:

• Qualified Domestic Trusts (QDOTs): A QDOT can help US citizens pass assets to non-US citizen spouses without immediate estate tax, deferring the tax until distributions are made from the trust.
• UK Spouse Exemption: In the UK, transfers between spouses are generally exempt from inheritance tax, provided both spouses are UK-domiciled. If one spouse is domiciled elsewhere, only a partial exemption may apply.

Leverage Life Insurance

Life insurance can be used to cover anticipated inheritance tax liabilities, providing liquidity to pay taxes without forcing the sale of family assets:

• UK Inheritance Tax Insurance: Policies specifically designed to cover inheritance tax can ensure that beneficiaries receive the intended inheritance without being burdened by tax bills.
• US Irrevocable Life Insurance Trust (ILIT): Placing life insurance in an ILIT keeps the policy proceeds out of the taxable estate, potentially reducing the estate tax liability.

Inheritance tax planning for families with property in the US and UK presents unique challenges, but with proactive strategies, it’s possible to reduce tax exposure and preserve wealth for future generations. Understanding the tax rules in both countries, utilizing available reliefs and exemptions, and engaging in careful planning around domicile, trusts, and marital strategies are key steps in effective inheritance tax planning.

Proper planning not only ensures tax efficiency but also provides peace of mind that your family’s financial legacy is protected, regardless of the complexities of cross-border taxation.

As 5^th April 2025 UK law is changing in regards to inheritance tax and the content of this article will superseded.  Make sure that you take advice from a tax advisor before doing any planning.