When we speak to the solicitors and US lawyers we work closely with, they report that they have never been busier advising clients about how to revise their wills and put in place effective US and UK inheritance planning. Also, we are speaking of a lot of money transferring to the next generation: Accenture estimates that millennials will receive $30 trillion or more from the baby boomers in the next two decades.
Clients are motivated to act today to protect their families and to ensure that they take advantage of the current opportunities for passing on wealth to the next generation.
Most commentators expect increases in taxes either directly or indirectly going forward to pay for supporting economies around the world during the pandemic.
Some of the proposals that have been floated include:
- A wealth tax which was a major plank in Elizabeth Warren’s presidential campaign platform and was mooted by Jeremy Corbin prior to last year’s general election. France has had one for a number of years.
- Eliminating or reducing the principal residence exemption in the UK
- Reducing the UK capital gains allowance and bringing US and UK capital gains tax rates more into line with income tax rates.
- Reducing the inheritance tax threshold in both the US and UK from the current levels of £325,000 and $12.06 million respectively per person. Above the exemption, the tax rate in both the US and UK is currently 40%. Americans may also be subject to state inheritance taxes if they own real property in that state, such as a holiday home, farm or other property.
- Eliminating the Potentially Exempt Transfer (“PET”) which takes a gift out of one’s UK estate if the donor outlives the gift by seven years.
Clients are looking at how to help their children and grandchildren through gifting strategies as well as ensuring that any inheritance they might receive is done in a tax efficient manner.
What are some of the planning opportunities available?
- Having a US resident relative establish 529 plan accounts for your children. These can help fund both private elementary and secondary schooling as well as university tuition both ins the US and Europe
- Using your $15,000 annual US exemption per recipient in conjunction with the PET regime. If you are married, you can both give $16,000 to each of your children or grandchildren.
- If you are married to a non-American and your principal residence is in your name, consider using the $164,000 annual tax free gift allowance to transfer part or complete ownership.
- If you are married to a non-American and have the possibility of funding all or part of their £20,000 annual ISA allowance, do it!
- If you are expecting a significant inheritance from a US parent and are not yet deemed domiciled in the UK for inheritance tax purposes (eg you have not lived in the UK for 17 out of the last 20 UK tax years), it may make sense for a US trust to be established for you and potentially your own children as beneficiaries.
We recommend that you speak to your legal and tax advisor about the best strategies for your own financial situation. Tanager works with most of the UK and US law firms that do inheritance and tax planning and would be happy to recommend one that is appropriate for you.