# UK resident in US: UK Inheritance Tax double treaty?



## ExpatNick (Sep 6, 2015)

Hello,

As a UK citizen soon to be resident in the US (California), can I ask - sorry for the macabre topic!! - but does anyone have any info on US taxation of goods / monies inherited in the UK? Does the UK/US double taxation treaty cover this and therefore avoid double taxation, or will I be stung for a large percentage of what has already had tax deducted in the UK? 

The situation is that an elderly relative is likely to pass away during my time in the US and I know I am named in the will, hence the query. My focus is obviously on the lady in question and her continued good health and welfare, but the inevitable will occur at some time - and I doubt she would want to lose a large chunk of her willed assets to a (foreign) taxman!!

Any info or leads very welcome - and thanks in advance!!

ExpatNick.


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## BBCWatcher (Dec 28, 2012)

ExpatNick said:


> As a UK citizen soon to be resident in the US (California), can I ask - sorry for the macabre topic!! - but does anyone have any info on US taxation of goods / monies inherited in the UK? Does the UK/US double taxation treaty cover this and therefore avoid double taxation, or will I be stung for a large percentage of what has already had tax deducted in the UK?


The United States does not have an inheritance tax with one exception noted below. It does have an estate tax. Consequently there is no U.S. federal inheritance tax. You will likely have to file IRS Form 3520 upon receipt of the inheritance. If your inheritance consists of fully liquidated assets sent to you in the form of a check in your name, that's probably the end of the matter. You deposit the check in your U.S. bank, and that's that. On the other hand, if your inheritance is in the form of non-liquidated foreign assets and/or foreign financial accounts then you could have at least first year U.S. tax filing obligations (before you liquidate the assets, if that's what you do). For example, if you inherit a foreign mutual fund then you'll probably have to file FinCEN Form 114, possibly IRS Form 8938, IRS Form 1040 Schedule B (to report the dividends), IRS Form 1040 Schedule D (to report any capital gains, if applicable), and/or IRS Form 8621 (to make mark-to-market elections on what is a Passive Foreign Investment Company, the foreign mutual fund).

You can take a guess which form of inheritance is more convenient.  However, except for IRS Form 3520, U.S. tax _complexity_ only starts from the date of your (non-liquidated, still foreign) inheritance and still benefits from the Foreign Tax Credit (for U.K. income tax paid) and any U.S.-U.K. tax treaty provisions. Once again, there is no U.S. federal inheritance tax.

There is a U.S. federal estate tax, but presumably there is no U.S. estate in question here. If there are U.S. assets, then the U.S. estate tax could apply. In general the U.S. estate tax does not apply to estates valued at $5.43 million or less.

California appears to be the same: no inheritance tax.

OK, now for the exception: "covered expatriates." A U.S. citizen or U.S. permanent resident who terminates his/her U.S. status and who has/had a fairly significant net worth can be classified as a "covered expatriate." If you inherit an estate from a covered expatriate, and if you are a U.S. person (citizen or resident), _then_ there is an inheritance tax. But as long as your elderly relative is not a "covered (U.S.) expatriate" at the time of her death, that exception does not apply.

So, to net it out:

1. There are no U.S. or California inheritance taxes (with the one exception noted above). All estate taxes on a purely foreign estate are settled outside the U.S.

2. You will likely have to _report_ the inheritance via IRS Form 3520 (and perhaps also a state equivalent form).

3. You assume U.S. and California tax responsibilities on follow-on income from your inheritance (e.g. interest, dividends, etc.) from the date of the inheritance. If those are non-liquidated foreign assets and/or foreign financial accounts then your tax responsibilities can be fairly complicated at least in reporting terms. (But if you already have such complications because you already have foreign income-producing assets and/or foreign financial accounts then that's probably not a big deal.)


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## ExpatNick (Sep 6, 2015)

*Thank you BBCWatcher!!*

Hello BBCWatcher.

Wow! Thanks for such a detailed response, and so fast! It's very much appreciated.

I think you've covered my situation as the relative has instructed that all assets (100% in the UK, and she's a UK citizen) be converted to cash before distribution, therefore whatever I'm lucky enough to receive will fall into the simpler of the scenarios you've mentioned. Phew, what a relief! I still don't want to lose her though, obviously.

Thanks again, BBCWatcher, and if ever I can reciprocate please feel free to ask.


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## Bevdeforges (Nov 16, 2007)

One thing to note in all of this: when the distribution is made, be sure to get something from the attorney or notaire or whoever is in charge of settling the estate to show that the estate is settled and all taxes have been paid. You may not need it, but when transferring funds or assets to the US from overseas, it can be a very handy document to have to prove the origin of the funds and avoid further complications.

Once the funds are yours, of course, you become taxable on any further income those funds generate, but at that point they are no longer part of the estate anyhow.

I know I had to show the probate certificate when importing a few pieces of furniture from my parents' estate and it saved quite a bit of hassle and explanation. A bank may ask for proof of the origin of the funds when making a large transfer overseas.
Cheers,
Bev


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## BBCWatcher (Dec 28, 2012)

Bevdeforges said:


> ....when the distribution is made, be sure to get something from the attorney or notaire or whoever is in charge of settling the estate to show that the estate is settled and all taxes have been paid. You may not need it, but when transferring funds or assets to the US from overseas, it can be a very handy document to have to prove the origin of the funds and avoid further complications.


Bev raises a good point for any fund transfers, really -- and not just those involving the United States. I agree -- good advice.

For the record, if for some extremely odd reason you want to do something dangerous like transport large sums of cash or "negotiable instruments" (cash equivalents) across a border, the U.S. requires filing a declaration (FinCEN Form 105) if the amount is US$10,000 or more. Other countries, including the U.K., have similar rules. But please don't do that. Banks and other regulated financial institutions (like CurrencyFair, Xoom, etc.) work well.

You also have the option to have the proceeds from the estate deposited into an ordinary U.K. bank account. Ordinary U.K. bank accounts are quite simple from a U.S. tax and financial reporting point of view. There's always a cost when converting between currencies, and you might as well avoid that cost unless it's absolutely necessary -- and then only incur the cost for the portion of funds required. Here's what you'd have to do on the U.S. side in terms of tax and financial reporting when you have an ordinary non-U.S. bank account (and you may already have to do this, so "nothing new"):

1. File FinCEN Form 114 each year if the total value of your foreign financial accounts (including joint and "signature authority" accounts) is US$10,000 or more at any time;

2. File IRS Form 8938 each year if you meet a higher threshold;

3. File IRS Form 1040 Schedule B to report the gross interest paid on the account;

4. File IRS Form 1116 to take a Foreign Tax Credit for the U.K. income tax you paid on the interest. The U.K. income tax rate on ordinary bank interest is a flat 20%. Usually you would see the net interest (after tax) in your bank account statements. For example, if you have £100 of ordinary bank account interest in 2015 net (after tax), then the gross interest is actually £125, and that's the amount you'd report on Schedule B (converted to U.S. dollars, of course). On Form 1116 you'd take a Foreign Tax Credit of 25 pounds (converted to U.S. dollars the same way). U.S. tax preparation software, including the free stuff such as TaxAct.com and TaxSlayer.com, handles all this for you pretty well using interview-style questions.

Upon doing a bit of research it appears that the Norwich & Peterborough Building Society offers the single best current account for these purposes, specifically its Gold Classic current account. The reason is that N&P provides Gold Classic account holders with a Visa ATM/debit card that has zero fees. You only pay the pure Visa network foreign currency exchange rate when using your N&P Gold Classic debit/ATM card at merchants. (Be sure NOT to let the non-U.K. merchant charge in U.K. pounds -- called "Dynamic Currency Conversion" -- but always in local currency.) You also pay zero (and get the pure Visa network rate) when you use this card to withdraw cash at an ATM as long as the ATM operator doesn't impose their own fee. There are surcharge free ATMs in the United States, though you have to check ahead of time which ones are surcharge free and use only those. Often the surcharge free ATMs will be located in pharmacies (Walgreens, CVS), supermarkets, and credit unions, though that's not a hard and fast rule. Many U.S. supermarkets will also let you charge $50, $100, or even more over your purchase, particularly when you use a debit card, so you can get some spare cash that way (and assuming you want to shop there and aren't buying something you don't need). To keep your Gold Classic current account free (avoid the £5/month maintenance fee) you simply need to maintain at least a £5,000 balance.

There are also U.K. credit cards that provide points or cash rebates and that also offer zero foreign transaction fees when you use them to spend at merchants such as U.S. supermarkets, restaurants, pharmacies, paying your mobile phone bill, etc., etc. But do NOT carry a balance -- make sure you pay off your credit card every month, preferably through automatic full monthly balance payment from your U.K. current account. Among the U.K. credit cards that look good for this purpose are: aqua Advance, Nationwide Building Society Select (though that requires also having a Nationwide current account), and the Saga Platinum (if you're 50 or older). Of those I like the aqua Advance the best since you earn rewards as Amazon credits, it's a MasterCard (a good pairing with the N&P Gold Classic current account's Visa debit/ATM card), and if you search a bit you should be able to find a £20 sign-up bonus for that card. Don't use a credit card for withdrawing cash from an ATM since that's a cash advance and expensive. Do use a credit card for spending at merchants, with your debit/ATM card as backup.

Yes, N&P offers fixed rate savings accounts, too. They're currently paying 1.9% gross on a 3 year fixed account, for example. Those are still considered ordinary bank accounts on the U.S. side with no added tax/financial reporting complexity, so if you want to park some of your inheritance there and get a higher rate of interest that'd be a reasonable way to do it. (Or you can use another bank's or building society's fixed rate term account.)

I'm an amateur at advising on U.K. financial accounts from a U.K. point of view, so this information is just based on quick research. If you want to get a second (or third...) opinion I'd recommend checking the U.K. section of this forum on what they'd recommend for overseas spending, but I think I've covered the basics pretty well.


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## BBCWatcher (Dec 28, 2012)

Upon further research, Charter Savings Bank is currently paying 2.55% AER (gross) on a 3 year fixed deposit, so you can do better than N&P if you're interested in that type of account as a place to park inherited funds. But N&P's Gold Classic's Visa debit/ATM card is hard to beat for overseas (including U.S.) ATM withdrawals, assuming you only frequent surcharge free ATMs.

Note that U.K. deposit insurance is limited to £75,000 effective January 1, 2016, per bank per account holder. Consequently it may make sense to spread your funds a bit. The U.S. FDIC and NCUA limits are $250,000 for comparison, and it's easier to "engineer" a higher limit (via something called "CDARS," for example). That doesn't mean you should convert all or even very many of your U.K. pounds into U.S. dollars -- not saying that at all.

....So, why wouldn't you convert? A lot of people who relocate internationally think that, along with their toothbrush and favorite pillow, they ought to pack all their cash in a suitcase (metaphorically at least) and transfer most or all of their funds to their new country. Usually that's a bad idea. As I mentioned, there's always _some_ cost to converting funds. Also, spending needs in the "old" country rarely dry up completely. Sometimes/often people go back, at least for vacations and visits to family and friends. Moreover, if you convert funds "all at once" you get one particular exchange rate at that moment in time. Since you cannot predict whether that's a "good" or "bad" exchange rate, you tend to mistime the foreign exchange market. If you convert a little bit at a time, on demand, then you tend to get a better average exchange rate over time. That's something called "dollar cost averaging" (or "pound cost averaging," as the case may be). Assuming, of course, you're minimizing exchange costs, and the advice above is very much along those lines.

Yes, pack the toothbrush and favorite pillow -- though if you forget your toothbrush you can stop by a dollar store in the U.S. and get two of them for a buck (plus sales tax). Pack _all_ your pounds? I'd vote no. Just pack the low-cost _instruments_ to tap into those pounds when/as you need them, i.e. a low-cost debit/ATM card and a low-cost credit card. That'll do nicely -- and, as a side benefit, you'll automatically enjoy full funds traceability if anybody ever has any questions about how you gained so many pounds. (Pun intended.)


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