Effective January 1, 2018, the Tax Cuts and Jobs Act granted U.S. citizens and domiciliaries an exemption of $11,180,000 with respect to U.S. estate tax for decedents dying in 2018. In 2022, the exemption was increased to $12,060,000. This means that individuals subject to the U.S. estate tax on the value of their worldwide assets do not pay U.S. estate tax unless the value of those worldwide assets exceeds $12,060,000. In addition, an unlimited amount can pass to the U.S. citizen surviving spouse free of estate tax.
Individuals who are not domiciled in the U.S. can also be subject to U.S. estate tax. However, their estates are subject to estate tax on U.S. assets only, not worldwide assets. Instead of receiving the benefit of an $12,060,000 exemption, they are entitled to an exemption of only $60,000. Effective January 1, 2013, the U.S. estate tax rates start at 18% and increase to a maximum of 40% on property valued at $1,000,000 and above. There is no automatic exemption for property passing to the spouse, unless the surviving spouse is a U.S. citizen, which is rarely the case.
While the U.S. is generally regarded as somewhat of a tax haven in terms of its income taxes, the estate tax on nondomiciliaries can be onerous. To illustrate the severity of the tax, property valued at $500,000 would result in a U.S. estate tax of $142,800. This is payable to the IRS no later than 9 months after date of death and, if not paid timely, is subject to penalties and interest, which would be added to the estate tax.
Individuals domiciled in the U.K. have significant advantages over residents of other countries due to the favorable provisions contained in the estate tax treaty between the U.S. and the U.K., which has been in effect since November 11, 1979. Article 8, Paragraph 5 of the treaty provides that the estate tax imposed in the U.S. on a domiciliary of the U.K. shall be limited to the estate tax that would have been imposed if the decedent had been domiciled in the U.S. immediately before his death. For decedents dying in 2022, this means that if the worldwide estate of the U.K. resident was valued at $12,060,000 or less at date of death, the U.S. estate tax would be zero, regardless of the value of the U.S. assets in relation to the value of the assets outside of the U.S. Even if no tax is due, the filing of a U.S. estate tax return is required if the value of the U.S. assets exceed $60,000 at date of death.
U.K. residents with worldwide assets in excess of $12,060,000 may still have planning opportunities available to them. For example, instead of taking title in their individual names, they could take title of their U.S. real estate in the name of a corporation. Upon their death, the value of the shares of the corporation would not be subject to U.S. estate tax. However, the disadvantage of this is that the corporate income tax upon sale of the property could exceed the U.S. income tax due had the property been held in their individual names. This difference has substantially diminished as the federal corporate income tax rate is a flat 21%, effective January 1, 2018.
Because this article deals exclusively with U.S. taxation, it is recommended that the U.K. resident consult his U.K. tax advisor to determine the tax effect in the U.K. before any final decision is made.
About the Author
Renea M. Glendinning, CPA, Shareholder, joined the firm in 1987 and has led the International Tax Department since 1996. She has authored articles regarding various international tax issues and frequently gives presentations on U.S. income and estate taxation of foreign nationals doing business in the U.S.
If you should have questions, you may contact Renea at 941-365-4617 or .
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