Losing a loved one, whether an immediate family member or a close friend or relative, can be one of the most turbulent, difficult periods in life. For many Americans living in Europe it can come with a number of additional challenges such as long-distance communications with medical institutions, banks and lawyers (to name a few), the stress of repeated trips back and forth to visit ill relatives and ultimately needing to drop everything and fly back to the USA for an (un)expected funeral. This is all before the complications of inheritance are considered. With so much to handle and thousands of miles of distance it’s easy to see why dealing with the death of a family member back home is frequently mentioned as the hardest part of living abroad.
With the death of a relative there are often assets to be passed on. A legacy gift from an inheritance is likely to change many people’s financial situation; paying off debt, starting a business or a family, or bolstering household savings. But American citizens living in the UK have additional considerations due to their dual tax obligations.
What needs to be done to make sure that your US inheritance doesn’t end up being taxed unnecessarily in the UK?
Dealing with Probate
Before an inheritance can be distributed the affairs of the person who has died need to be wrapped up through a legal process called probate.
The people responsible for making sure that the deceased’s financial affairs are in order and the probate process is settled are called “executors”. Quite often it falls to someone living abroad to act as an executor for a parent or close family member. This can be tricky at a distance, and if you’ve been asked to act as an executor it’s important to be on top of any responsibilities required. If you are appointed as an executor, be sure to get a copy of all of the relevant documents – wills, trusts, letters of wishes – and know what assets and debts are part of the estate and which financial institutions are involved in holding assets or providing credit.
The process of acting as an executor is complicated and the exact forms and requirements vary between states. However, at a high level all executors are responsible for locating and itemizing assets, contacting creditors and settling any outstanding debts, filing records with the probate courts, preparing a final tax return, and managing the final payment to the heirs of the estate.
Even at this early stage it’s important to start gathering a professional team to help. Acting as an executor from abroad can be made a lot easier by involving a local attorney who specializes in working with probate. They can help with the cataloguing of assets, shepherding the case through the probate courts, selling and distributing assets, and more. It’s also important to have a good accountant who is qualified to work in both the US and UK, since inheriting money from different countries may involve filing unusual tax forms. Having a good team is key.
Financial Planning for an Inheritance
Once probate has concluded and the inheritance is ready to be transferred, many American citizens living in the UK begin to worry about taxation.
The important point to remember is that receiving an inheritance is not a taxable event in either the US or the UK. Any estate tax (in the USA) or inheritance tax (in the UK) should be paid by the estate before it is passed to the heirs. Therefore, the inheritance you receive should not be subject to additional UK inheritance tax or US estate tax when you receive it.*
While you won’t be liable for any more taxes on the receipt of your inheritance, once you take ownership of the assets you’ll need to plan for how you are going to handle them. Once they are in your name you will be liable for any income and capital gains they generate, not just in the USA but also very likely in the UK. Without careful upfront planning, it’s extremely easy to trigger penalty taxes or double taxation on the assets that you’ve received from your inheritance.
There are a number of potential pitfalls when considering how to manage the proceeds of your inheritance. Many expats move their inheritances to the UK and convert their assets to pounds sterling (often suffering excessive foreign exchange charges and commissions) only to find that UK investment firms are reluctant to work with Americans and many British investment products carry warnings saying that they are ‘not suitable for US persons.’ Others continue to use investment brokerage accounts in the USA, which often contain investment products that are subject to penalty taxes from HMRC. The solution to this is to get advice from professionals who are qualified to recommend US and UK investments to Anglo-American households. Good financial planning and advice will result in an investment plan that is tax-efficient for both the US and UK tax authorities and is tailored to you and your needs.
It is also important to be aware of the types of accounts you receive in your inheritance. If some of your inheritance is held in trusts careful planning needs to be carried out to see how the trusts will be treated by HMRC. While the details of trust planning are beyond the scope of this article, it can be important to get coordinated advice from your professional advisors. Additionally, many inheritances include some retirement assets from a 401(k), IRA, or similar account. The rules regarding inherited retirement accounts changed significantly in early 2020 and vary depending on your relationship to the deceased.
You should consult with a dual-qualified US and UK financial planner together with a tax advisor to make a plan for the best way to handle the different elements of your inheritance.
The Importance of Planning Early
Given the number of cross-border issues that need to be considered when you inherit assets from the USA, it’s important to be prepared.
Bereavement is emotional, and the practical and financial realities of inheriting money can feel disorienting and complex when you’ve lost someone close to you. Receiving an inheritance can feel like winning a lottery you never wanted to play. And just like winning the lottery it can be difficult to manage your day-to-day expenses when you have more money than you are used to having. The evidence suggests that, just like lottery winners, many people who receive inheritances spend everything in a short period of time. It is therefore important to consider your personal household financial situation and focus on some of the basics of good financial planning: putting money aside for a rainy day, setting a budget and sticking to it, and planning for your future. With a professional team in place and a financial plan to guide you, an inheritance can be an incredible asset that lasts you for the rest of your life.
Getting the advice of a dual qualified financial advisor can be extremely helpful as you plan how to structure your inheritance. To get more information and personalized help on your inheritance, please contact Patrick Mulhern at Tanager Wealth Management LLP at firstname.lastname@example.org.
* Please note that Tanager Wealth is not an accountancy firm and you should speak with a qualified accountant to understand how your inheritance will impact the rest of your taxes in the US and the UK.