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How can we avoid double taxation and UK inheritance tax?

My wife and I plan to purchase a home in London for our family so our children can enrol in a British school. We’re US citizens and want to keep our estate in California. We’ve heard we need to be wary of double taxation and UK inheritance tax. What should we do to avoid UK tax traps and when should we start looking at this?

Xavier Nicholas, partner and head of private client at law firm Forsters, says that as an international buyer it’s vital you seek tax advice before acquiring a home in the UK. Unexpected tax liabilities can surprise the unprepared, while well-advised buyers will have the best chance of limiting their exposure.

Headshot of Xavier Nicholas, partner and head of private client at Forsters,
Xavier Nicholas, partner and head of private client at Forsters

You are right to identify inheritance tax (IHT) as a concern. Non-UK domiciled individuals are subject to IHT at a rate of 40 per cent to the extent that the value of their UK estates exceeds the tax-free “nil rate band” allowance (NRB). At a modest £325,000 (or in some cases, £500,000), the limited scope of the NRB can come as a shock to those relocating from the US, where the amount that can pass free of federal estate tax is currently $11.7mn.

Planning might include securing the exemption that applies to transfers between spouses, using debt to reduce tax exposure, and in some cases co-ownership with children. Depending on your circumstances, specialist life insurance may be an option to cover any residual liability. If it is, it needs to be written into a trust that avoids unwanted tax charges on both sides of the pond. Whatever your circumstances, it’s crucial that your estate planning is overseen by advisers who can comment from both a UK and US perspective.

As US citizens moving to the UK, your continued exposure to US income tax on your worldwide assets might feel like the elephant in the room. In most cases, double taxation can be avoided under the terms of the US-UK tax treaty. However, there are exceptions.

Relief from capital gains tax in the UK that applies on the disposal of a primary residence is more limited in the US. If you have assets in US trusts or limited liability companies, there can be significant mismatches in their tax treatment.

Prioritise UK tax advice before you and your family move as, unfortunately, not all planning will be effective if you wait until you’re living in your new home.

My long-term partner died intestate. Can I claim on his estate?

My partner passed away suddenly at the start of this year intestate. Although aware of the benefits of having a will in place for financial planning, my partner and I were still under 30 years old and had neglected to draft these documents. Although we had been living together for nearly five years we had not yet tied the knot.

Do I have the rights to make a financial claim against my partner’s estate and, if I so, how should I go about this? If we had been married, would this change my rights to the passing of such wealth without a will in place and if so how?

Caroline Miller, partner at law firm Wedlake Bell, says that unfortunately, death is one of the few certainties in life and not planning for it can result in the very sad scenario described.

Caroline Miller, partner at Wedlake Bell
Caroline Miller, partner at Wedlake Bell © Edward Webb

At present in England, there is no such thing as a “common law spouse”, so if someone dies without a will, their estate will pass under the intestacy rules. This means a surviving partner (of whatever length of relationship) is unable to benefit if there was no marriage or civil partnership. Depending on the deceased’s situation, their estate could pass to a distant relative with whom they had no close connection; or where no surviving relatives can be found, to the Crown.

The partner is left both bereaved and financially worse off. In this scenario, you can consider bringing a claim under the Inheritance (Provision for Family and Dependants) Act 1975. Under this Act, people who lived together for a minimum of two years as “husband and wife” can bring a claim for “reasonable financial provision”.

For many, the thought of legal challenge when dealing with a bereavement may seem unconscionable; but unfortunately it is usually the only way to attempt to receive something from the deceased’s estate. It would involve lodging a claim form at court to commence proceedings, in conjunction with legal advice.

Where a couple are married or in a civil partnership (for however short a time), the surviving spouse is entitled to a share in the estate of the deceased spouse under the intestacy rules if there is no will.

They would receive a statutory legacy of £270,000 plus either the remainder of the estate or, if there are children, 50 per cent of the remainder of the estate. For many, this is still not sufficient. For example, under intestacy rules, the interests of minor children are locked into trust until they are 18; whereas, if that money had been left to them under a will, it could be accessed by trustees for their upbringing.

In short, without a will you are in the hands of a set of archaic rules that do not necessarily reflect how many in society live today. For married couples and civil partners, they at least have the right to benefit under those rules, whereas couples without a partnership in law do not.

Though I regret to say it is too late in your case, the solution in either scenario is to have a properly drafted will that passes your estate to your choice of beneficiaries. In terms of succession rights, this bridges the gap between those who have tied the knot, and those who have not.

The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.

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