Gifts and family succession planning
The transfer of wealth is an emotive topic and there are many non-tax considerations which need thought and attention before tax comes into the conversation. However, the tax constraints can help to focus the mind and identify the available options.
Focusing solely on the US/UK transfer tax implications of lifetime giving, the important factors are the US/UK tax status of the donor and the situs of the asset itself. The recipient of a gift is not themselves typically subject to US/UK transfer tax and so their status does not always play an important role.
The Donor
US citizens and US domiciled individuals are subject to US Gift tax on lifetime transfers of their worldwide assets. An outright gift to another individual typically qualifies for the annual exclusion, meaning a donor can give up to $17,000 (for the 2023 tax year) to any number of individuals without the gift being taxable. Where that gift is to a non-US spouse, that annual exclusion is increased to $175,000 (for the 2023 tax year).
Gifts in excess of those exclusions are taxable but will effectively reduce the donor’s combined US Estate & Gift tax exemption which stands at $12,920,000 (for the 2023 tax year). If some/all of the US Estate & Gift tax exemption is used during lifetime, it is not available on death.
Absent the availability of any exclusions, a transfer into trust will reduce the donor’s combined US Estate & Gift tax exemption in the same way as a gift to another individual. When held by a Trust, assets can be structured to be outside of any individual’s estate for US Estate & Gift tax purposes.
UK domiciled or deemed domiciled individuals are subject to UK Inheritance tax (IHT) on lifetime transfers of their worldwide assets. An outright gift to another individual is regarded as a potentially exempt transfer (PET), meaning if the donor survives seven years from the date of the transfer there is no UK IHT exposure. Death within the seven-year period attracts UK IHT at a maximum rate of 40%; this is tapered down provided the donor survives three years from the date of transfer.
A limited exemption from UK IHT (or nil rate band) is available for all individuals, currently equivalent to £325,000 of value. This can be increased to £500,000 of value where a personal residence is transferred on death to a direct descendent. The additional amount is tapered down for an estate with a net value more than £2,000,000. A number of exemptions exist for lifetime giving, which include:
- £3,000 annual exemption (per donor; unused exemption can be carried forward one year only)
- wedding or civil ceremony gifts of up to £1,000 per donee (extended to £2,500 for a grandchild or great-grandchild, £5,000 for a child)
- normal expenditure out of income
- payments to help with another person’s living costs, such as an elderly relative or a child under 18, and
- small gifts of up to £250 (per donee, as long as another exemption hasn’t been used for a gift to the same person).
Absent the availability of any reliefs (not covered in this article) or exclusions (e.g., the nil rate band), a transfer into trust can attract an immediate 20% UK IHT charge. Trusts can also be exposed to exit and decennial UK IHT charges at a maximum 6%.
The Asset
The gift of certain assets are subject to transfer tax regardless of the status of the donor. This is predominantly dependent on where the asset is physically located.
The best example is real estate, which is always subject to US or UK transfer tax in the country in which it is located.
The deemed domiciled American
A US citizen living in the UK who is now deemed domiciled in the UK is subject to both US and UK transfer tax on any lifetime transfer. This does not preclude that person from making lifetime gifts; there are just two jurisdictions rules to consider!
On a smaller scale, effective planning could be implemented by using the US annual exclusion and relying on the UK IHT expenditure out of income exemption. This typically works for regular gifts, for example payment of a monthly ‘allowance’, or gifts into an insurance trust to fund the payment of insurance premiums.
For larger one-off outright gifts, like helping a child onto the property ladder, a well-trodden path is to consider using some of the US Estate & Gift tax exemption and knowingly making a PET. The donor could consider the use of life insurance to protect from UK IHT in the seven-year period.
More complex planning involving trust or corporate/partnership structures can also be considered dependent on the donor’s asset base and the desire to retain an element of control, or where outright gifts are not appropriate.
