The UK/US Tax systems rarely work in harmony together, yet given the common UK/US marriages; it is surprising that planning for the future in one country will not be sufficient to cover you in the other. A lack of planning will inevitably hurt the pockets, and will become an irritating and frustrating issue given the nature of the tax following a spouse’s death.
The UK states under IHT rules that the UK domiciliary is liable to 40% of worldwide assets, an individual becomes domiciled after residing in the UK for 17 out of the previous 20 years. A common problem is the mismatch between couple’s domiciles. The ‘Spouse Exemption’ allows no Inheritance Tax transfers after death, providing comfort that financial life shall not be altered. This is however limited to £55,000 on transfer to non- UK domiciliary spouses, and is known at the nill rate band (NRB). Above this, taxation of assets is 40%, and this is even if assets are jointly owned, causing hardship to the surviving spouse and disappointing children. Public Policy dictates once assets have left the UK they no longer taxable resulting in spouse exemption. Countries of course are aware of this, the US is particularly vigilant.
A spouse with US connections should seek US advice on tax, here you can understand the liabilities and extent to which the Anglo/US Tax Treaty, (theTreaty) is applied and the potential reduced rate offered. The US Death Tax is less than the UK but gradually increases on income until 35% taxation occurs at $500,000. If discussions between the two countries advisors do not take place, then you may well leave one side thoroughly exposed to over taxation. Jurisdictions may have taxation rights on one individual but without offering the same reliefs. It is absolutely necessary to liase between the two countries advisors and establishes a definitive plan prior to a spouse’s death, ensuring you have fiscal guarantees on liabilities for your family.
Inheritance Tax in the UK often catches out families which have failed to meticulously document their net worth and investments. The Tax Calculator below provided by St James’s Wealth Management, can foresee your future taxation, enabling you to plan ahead and reassess the structure of your assets and liabilities. It may also be useful for Non UK residents to understand the value of their British Investments and their own taxation system.