Dual-American UK (British) Resident Estate Tax Treaty Overview

About Dual-American UK (British) Resident Estate Taxation

When it comes to tax treaties between foreign countries, oftentimes the focus will be on income tax issues — and not the gift and estate tax issues. For example, if a resident of one country resides in the other country but is receiving a pension from the first country – – how is the income taxed in the country of residence? In addition to income tax treaties, there are various other types of treaties and agreements as well such as Totalization Agreements (Social Security) and FATCA Agreements (Foreign Account Tax Compliance Act). The United States has also entered into a limited number of estate and/or gift tax treaties with less than 20 different countries. The United States and the United Kingdom have entered into several tax treaties, including a Gift and Estate Tax Treaty. Let’s take a brief look at a few of the key United Kingdom estate and gift tax treaty provisions:

Purpose of the Estate and Gift Tax Treaty

In general, the concept behind the estate and gift tax treaty is that when a taxpayer who is a resident of one country owns assets located in the other country (which will be taxed in the other country), the estate should not be taxed by both countries for assets within the respective countries that was already taxed by the other country. For example, if a US person passed away with $15 million worth of assets — even after applying the exemption/exclusion amount — there could still be a tax liability on the remainder. The goal of the estate and gift tax treaty is to minimize double taxation.

Five Important Aspects of the UK/US Estate and Gift Tax Treaty

Here are some of the more important aspects of the United Kingdom in the US estate and gift tax treaty:

Definitions are Important

Key Definitions

• • • the term “United States” means the United States of America, but does not include Puerto Rico, the Virgin Islands, Guam or any other United States possession or territory;

    • the term “United Kingdom” means Great Britain and Northern Ireland;

    • the term “tax” means:

      • the Federal gift tax or the Federal estate tax, including thetax on generation-skipping transfers, imposed in the United States, or

      • the capital transfer tax imposed in the United Kingdom, or

      • any other tax imposed by a Contracting State to which thisConvention applies by virtue of the provisions of paragraph (2) ofArticle 2, as the context requires; and

Taxing Rights

• • • (1)(a) Subject to the provisions of Articles 6 (Immovable Property (Real Property)) and 7 (Business Property of a Permanent Establishment and Assets Pertaining to a Fixed Base Used for the Performance of Independent Personal Services) and the following paragraphs of thisArticle, if the decedent or transferor was domiciled in one of the Contracting States at the time of the death or transfer, property shall not be taxable in the other State.

    • (b) Sub-paragraph (a) shall not apply if at the time of the death or transfer the decedent or transferor was a national of that other State.

What does this Mean?

It means that subject to certain exceptions, exclusions, and limitations, if a person passed away in either the United States or the United Kingdom, their property shall not be taxable in the other state. For example, if a person is domiciled in the United Kingdom at the time of her death then the property shall not be taxable in the United States. There is a big glaring limitation, which is that the rule does not apply if that person was a citizen of the other state. For example, expanding upon the example above, if the decedent was a citizen of the United States but passed away in the United Kingdom, the US would still have the right to tax the decedent’s estate.

Immovable Property (Real Property)

• • • (1) Immovable property (real property) may be taxed in the Contracting State in which such property is situated.

    • (2) The term “immovable property” shall be defined in accordance with the law of the Contracting State in which the property in question is situated, provided always that debts secured by mortgage or otherwise shall not be regarded as immovable property. The term shall in any case include property accessory to immovable property, livestock and equipment used in agriculture and forestry, rights to which the provisions of general law respecting landed property apply, usufruct of immovable property and rights to variable or fixed payments as consideration for the working of, or the right to work, mineral deposits, sources and other natural resources; ships, boats, and aircraft shall not be regarded as immovable property.

    • (3) The provisions of paragraphs (1) and (2) shall also apply to immovable property of an enterprise and to immovable property used for the performance of independent personal services.

What does this Mean?

In general, real property is considered unique to the country where can be found. This is also reflected in the treaty in so far as real property can be taxed in the country where the property is situated. Thus, in an example where the person is not a national of the other country and resides in the other contracting state, real estate located in the other contracting state can still be taxed by the country where the property is located.

Deductions, Exemptions, Etc.

• • • (1) In determining the amount on which tax is to be computed, permitted deductions shall be allowed in accordance with the law in force in the Contracting State in which tax is imposed.

    • (2) Property which passes to the spouse from a decedent or transferor who was domiciled in or a national of the United Kingdom and which may be taxed in the United States shall qualify for a marital deduction there to the extent that a marital deduction would have been allowable if the decedent or transferor had been domiciled in the United States and if the gross estate of the decedent had been limited to property which may be taxed in the United States or the transfers of the transferor had been limited to transfers of property which may be so taxed.

    • (3) Property which passes to the spouse from a decedent or transferor who was domiciled in or a national of the United States and which may be taxed in the United Kingdom shall, where

      • (a) the transferor’s spouse was not domiciled in the United Kingdom but the transfer would have been wholly exempt had the spouse been so domiciled, and

      • (b) a greater exemption for transfers between spouses would not have been given under the law of the United Kingdom apart from this Convention, be exempt from tax in the United Kingdom to the extent of 50 per cent of the value transferred, calculated as a value on which no tax is payable and after taking account of all exemptions except those for transfersbetween spouses.

What does this Mean?

This article refers to the fact that the taxpayer may qualify for certain deductions such as the marital deduction that would have been allowable if the person was residing in the other country. This is designed to reduce the amount of double estate tax that could be levied by the other country.

Credits

• • • (1) Where under this Convention the United States may impose tax with respect to any property other than property which the United States is entitled to tax in accordance with Article 6 (Immovable Property (Real Property)) or 7 (Business Property of a Permanent Establishment and Assets Pertaining to a Fixed Base Used for the Performance of Independent Personal Services) (that is, where the decedent or transferor was domiciled in or a national of the United States), then, except in cases to which paragraph (3) applies, double taxation shall be avoided in the following manner:

      • (a) Where the United Kingdom imposes tax with respect to property in accordance with the said Article 6 or 7, the United States shall credit against the tax calculated according to its law with respect to that property an amount equal to the tax paid in the United Kingdom with respect to that property.

      • (b) Where the United Kingdom imposes tax with respect to property not referred to in sub-paragraph (a) and the decedent or transferor was a national of the United States and was domiciled in the United Kingdom at the time of the death or transfer, the United States shall credit against the tax calculated according to its law with respect to that property an amount equal to the tax paid in the United Kingdom with respect to that property.

    • (2) Where under this Convention the United Kingdom may impose tax with respect to any property other than property which the United Kingdom is entitled to tax in accordance with the said Article 6 or 7 (that is, where the decedent or transferor was domiciled in or a national of the United Kingdom), then, except in the cases to which paragraph (3) applies, double taxation shall be avoided in the following manner:

      • (a) Where the United States imposes tax with respect to property in accordance with the said Article 6 or 7, the United Kingdom shall credit against the tax calculated according to its law with respect to that property an amount equal to the tax paid in the United States with respect to that property.

      • (b) Where the United States imposes tax with respect to property not referred to in sub-paragraph (a) and the decedent or transferor was a national of the United Kingdom and was domiciled in the United States at the time of the death or transfer, the United Kingdom shall credit against the tax calculated according to its law with respect to that property an amount equal to the tax paid in the United States with respect to that property.

    • (3) Where both Contracting States impose tax on the same event with respect to property which under the law of the United States would be regarded as property held in a trust or trust equivalent and under the law of the United Kingdom would be regarded as property comprised in a settlement, double taxation shall be avoided in the following manner:

      • (a) Where a Contracting State imposes tax with respect to property in accordance with the said Article 6 or 7, the other Contracting State shall credit against the tax calculated according to its law with respect to that property an amount equal to the tax paid in the first- mentioned Contracting State with respect to that property.

      • (b) Where the United States imposes tax with respect to property which is not taxable in accordance with the said Article 6 or 7 then

        • (i) where the event giving rise to a liability to tax was a generation-skipping transfer and the deemed transferor was domiciled in the United States at the time of that event,

        • (ii) where the event giving rise to a liability to tax was the exercise or lapse of a power of appointment and the holder of the power was domiciled in the United States at the time of that event, or

        • (iii) where (i) or (ii) does not apply and the settlor or grantor was domiciled in the United States at the time when the tax is imposed, the United Kingdom shall credit against the tax calculated according to its law with respect to that property an amount equal to the tax paid in the United States with respect to that property.

    • (c) Where the United States imposes tax with respect to property which is not taxable in accordance with the said Article 6 or 7 and subparagraph (b) does not apply, the United States shall credit against the tax calculated according to its law with respect to that property an amount equal to the tax paid in the United Kingdom with respect to that property.

    • (4) The credits allowed by a Contracting State according to the provisions of paragraphs (1), (2) and (3) shall not take into account amounts of such taxes not levied by reason of a credit otherwise allowed by the other Contracting State. No credit shall be finally allowed under those paragraphs until the tax (reduced by any credit allowable with respect thereto) for which the credit is allowable has been paid. Any credit allowed under those paragraphs shall not, however, exceed the part of the tax paid in a Contracting State (as computed before the credit is given but reduced by any credit for other tax) which is attributable to the property with respect to which the credit is given.

    • (5) Any claim for a credit or for a refund of tax founded on the provisions of the present Convention shall be made within six years from the date of the event giving rise to a liability to tax or, where later, within one year from the last date on which tax for which credit is given is due. The competent authority may, in appropriate circumstances, extend this time where the final determination of the taxes which are the subject of the claim for credit is delayed.

What does this Mean?

This refers to the idea of estate tax credits and that if the taxpayer has already paid tax in one country as a result of the estate tax, then they may receive a credit in the other country so they are not being double0-taxed. As you can see from the article, it is very complex and involves many twists and turns – and many exceptions and limitations apply.

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