Navigating estate administration for US individuals with UK assets
Key challenges, hidden complexities, and planning strategies for transatlantic estates.
The US and the UK are separated by the vast and tumultuous waters of the Atlantic Ocean. Those with connections to both countries often find themselves rowing against the tide between two very different and complex regimes.
In our Navigating the Atlantic series, we help you understand the issues, avoid the traps, and discover ways to plan ahead. In this instalment, we consider some of the key issues arising for executors of the estates of deceased US persons with UK assets.
Exposure to UK inheritance tax
Early in the process, thought will need to be given to the deceased’s exposure to UK inheritance tax (IHT). This is because an English grant of probate (which will entitle the executors to collect in the deceased’s UK assets) will not be issued by the Probate Registry until HMRC confirms that all IHT due from the estate at that stage has been paid.
The following headline points should be borne in mind:
- The deceased’s exposure to IHT will depend on whether they were a ‘long term resident’ (LTR) of the UK at the time of death. With some limited exceptions, they will have been LTR if they were UK tax resident in the UK tax year of death and they had been UK tax resident in ten or more of the previous 20 UK tax years:
- The worldwide estate of a deceased LTR will be exposed to IHT.
- If the deceased was not an LTR, only their UK assets and non-UK situs assets to the extent that they (directly or indirectly) derive their value from UK residential property will be exposed to IHT.
- IHT is charged at a flat rate of 40% on death if and to the extent that the value of the taxable estate exceeds the deceased’s available ‘nil rate band’ (NRB) amount of up to £325,000.
- Assets left to a surviving spouse should generally pass free of IHT. However, there is a limit to this where the deceased was an LTR and the surviving spouse is not (in which case the ‘spouse exemption’ is capped at £325,000 in addition to the available NRB amount).
- Gifts to individuals made in the seven years prior to death may become chargeable to IHT on death, so the executors will need to ascertain and may need to report historic transfers of value as well as the value of the deceased’s assets at the time of death.
- Trusts settled by the deceased during lifetime will also need to be considered, as the assets of those trusts may be considered to form part of the deceased’s estate for IHT purposes and additional IHT might be due if the settlor transferred assets to the trusts within seven years of death.
- Careful consideration will need to be given to the availability of exemptions and reliefs from IHT, which might be available in the US and not the UK, or vice versa.
Reporting and payment of IHT
Unless the estate falls within the narrow category of being an ‘excepted estate’ for IHT purposes (which might be the case, for instance, where the value of the estate situated in the UK only consists of cash or quoted shares or securities not exceeding £150,000), a full IHT account will need to be filed with HMRC within 12 months of the date of death. If the account is not filed within this timeframe, HMRC can issue penalties for non-compliance.
However, payment of IHT falls due sooner; six months from the end of the month of death. HMRC will charge interest at variable rates (currently 7.75%) on any unpaid IHT from that date.
Interaction with exposure to US estate tax
If the deceased was a US citizen or resident (for US estate tax purposes), or if the deceased was a non-US citizen/resident but owned certain types of US assets (including real estate) at the time of death, the estate might also have an exposure to US estate tax. Where there is an exposure to tax under the domestic rules of both the US and the UK, the executors will need to rely on the estate tax treaty between the two countries (“the Treaty”) to avoid double taxation. Broadly speaking, the Treaty provides for a system of credits, by which tax paid in one country can be credited against the liability arising in the other.
Practical challenges where there is dual US-UK exposure
Before HMRC will give up its right to tax assets under the Treaty, the IRS must certify that the relevant assets have been disclosed to them and that any US estate tax falling due has been paid or will be enforced by them. The IRS is currently taking around 18-24 months (or longer) to provide such certifications. This is problematic because, in the meantime, HMRC is within its rights to demand payment of the IHT due on application of the English grant in full, without taking account of any double taxation relief provided for by the Treaty. We are often required to enter into negotiations with HMRC on behalf of our clients to limit the initial assessment of IHT to assets in respect of which the UK has primary taxing rights under the Treaty.
Applying for the English grant of probate
Usually where the deceased’s English assets are covered by a US will and a grant has not yet been issued in the US, the Probate Registry will require an affidavit of foreign law (provided by local counsel from the relevant US state) confirming the validity of the will as a matter of local law and who is entitled to administer the estate.
This gives rise to an additional administrative hurdle (and associated costs) for the executors that would not arise if there was an English will in place. If primary probate is granted in the US, the Probate Registry will generally accept a court-exemplified copy of the US will to probate in England without an affidavit. However, this option has its own disadvantages, including the inevitable delay in administering the UK assets. For these reasons, we normally recommend that our clients put English wills in place to cover their UK assets. While not essential, this should facilitate the administration of the UK estate on death and reduce the burden on the executors as both administrations can run concurrently.
Executors’ personal liability and the need for professional advice
As a matter of English law, the executors of an estate are responsible for the administration of the estate in accordance with the law. This includes settling any liabilities of the estate and paying any tax that falls due. If there are insufficient funds in the estate to provide for these outgoings because of the estate having been administered incorrectly, the executors could be held personally liable for the unpaid amounts. For that reason, a large proportion of executors of UK estates will seek the advice of specialist solicitors to ensure they adhere to their strict duties and obligations.
Other UK reporting obligations
The executors’ UK reporting obligations do not start and finish with the IHT account. They will also need to be mindful of their UK income tax and capital gains tax reporting obligations, as well as considering whether they are obliged to register the estate with HMRC’s Trust Registration Service (also known as the “TRS”). Advice should be taken to ensure compliance with these requirements.
Conclusion
Administering the estate of a US-connected individual with UK assets requires personal representatives to navigate two separate tax and legal systems, each with its own rules, deadlines and risks. Our US/UK Private Client team advises on every stage of the process from assessing IHT exposure and preparing English probate applications, to managing cross-border tax issues, negotiating with HMRC, and coordinating with US. Whether you are an executor, adviser or family member, we help you steer a clear course through the complexities and ensure the estate is administered efficiently, compliantly and with confidence.
