In ideal circumstances, the US parent and the UK child would sit down together to reflect on what estate planning solutions might work that are effective and tax-efficient in both jurisdictions.
There are almost always more options available if the US parent is still alive because they may be able to update their will or amend the provisions of existing trusts to make the eventual UK tax treatment for their UK child more favourable.
That said, such forethought is of course not always possible. However, the following are some key questions that any UK resident in receipt of wealth from the US should ask:
- Does the inheritance come directly from the US individual’s estate under their will, or does it come via some form of trust mechanism?
- If it is a payment that comes from a trust, what is that trust’s UK characterisation and thus its tax treatment?
- If you are inheriting out of a trust, do the trustees have the flexibility to ensure that you receive your distribution at the same time that the trust is wound up in favour of all the other beneficiaries? Alternatively, is any beneficiary’s share being left on trust because they are, for example, a minor or vulnerable beneficiary?
- If the trust is to continue, who are the trustees and are any of them UK resident? Are any of the replacement trustees UK resident and thus might they inadvertently fulfil that role in the future?
One might expect that, in our increasingly mobile world, the US and UK tax authorities would have found solutions by now to these fairly common problems.
However, although it may seem like a UK resident is simply receiving an inheritance and that there should be a universal and consistent tax treatment, the fact is that the number of possible variables means that it is impossible to generate a one-size-fits-all approach.
These matters require careful analysis to ensure that the correct filings are made to the US and UK, so as to avoid future challenges by the tax authorities.
Or, to quote George Bernard Shaw again: "Never wrestle with a pig. You get dirty and the pig likes it".
Aidan Grant is a senior associate at Collyer Bristow LLP
