Tuesday 29 March 2011

Inheritance tax on US shares?

Question
As a UK citizen/resident I have some US stocks held with Charles Schwab, a US broker. They claim that if I die, I am subject to US estate taxeson my account with them. I mentioned to them that I should consider moving these stocks to a UK broker, but they claimed that I would not make any difference as estate taxes are liable on all offshore holders of US assets. However when I talked to my UK broker about holding US assets they denied this saying that it make no difference whether I have US or UK assets. Who is right?Answer
I'm afraid US tax law isn't my forte, but my understanding is as follows:

Estate tax is the US equivalent of inheritance tax and is normally charged on 'alien non-residents' unfortunate enough to die while owning US 'situated' assets worth more than $60,000. On death, the assets above this limit are subject to estate tax at rates of up to 35%.

However, under the 1979 US/UK Estate and Gift Tax Convention it seems that you won't be liable to 'estate tax' in the US on the shares you own there provided you're domiciled in the UK (there was a later double taxation convention in 2001 but this didn't cover estate tax, so the 1979 convention still stands in this respect).

The relevant wording is Article 5 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 this Article, 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."

The 'following paragraphs' referred to don't seem to affect the position provided you're not a US National and Article 6 basically says that property (e.g. a home, investment property in the US) will be subject to estate tax.

So it doesn't matter whether the US shares are held with a US or UK stockbroker, they should be exempt from US estate tax in your situation.

If your shares are worth more than $60,000 I'd suggest checking with an accountant to be sure, but I'm pretty sure the above is correct.

As an aside, make sure you've completed US form W8-BEN via your stockbroker (if you haven't already) to ensure that the usual 30% US withholding tax on dividends is reduced to 15% (for UK residents).

Read this Q and A at http://www.candidmoney.com/questions/question437.aspx

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