Q. I am the beneficiary in the will of a relative who recently died in the US. She is British by birth but has lived in the US for more than 60 years. Will I have to pay inheritance tax on this bequest?
My second question is that my wife and I are both in our nineties so our family is unlikely to benefit from the seven-year rule on any gift to them. How can I make “the gifts out of surplus income rule” work for me?
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It’s unlikely that you will have to personally pay inheritance tax on the bequest. In the UK at least, your relative’s executors would be required to pay any inheritance tax from the estate as part of the probate process.
This could reduce what you receive, depending on the wording of the will (if there is one). For example, if there is a will and you are given £10,000 that is stated to be paid free of tax then, providing there are sufficient assets in the estate to achieve this, you should receive the full £10,000 (and the tax that is paid by the executors to HM Revenue & Customs would not affect you).
However, if you are due to receive, say, a 50 per cent share of the estate, the inheritance tax the executors pay on your share will in turn reduce what you receive.
In the circumstances, the executors will need to assess the position in the UK and the US. In a cross-border estate there are a huge number of variables that dictate the tax position: the value of the estate; where the assets are; where your relative was regarded as domiciled; whether there is a will and, if there is, what it says as to who should pay the tax.
On this basis, it would be sensible to get some professional advice. If you are one of the appointed executors, I would suggest you seek advice initially from a solicitor in the jurisdiction in which most of the assets are held. If you are not an executor, I suggest you contact them initially to understand all of the circumstances, next steps and the timelines.
With regards to gifts out of excess income, this is a very useful exemption because the seven-year rule that you mention in your question does not apply when this relief is used properly.
If the exemption is claimed successfully, the gifts are immediately tax-free and there is no need to survive for seven years. There is no annual cap on the amount that can be given inheritance-tax free as long as they are regular gifts made from your income (such as from pension or rental income) and not capital (such as house proceeds) and do not negatively affect your quality life.
The complexity arises from the fact that HMRC will require a great deal of information about your income and outgoings for each relevant tax year for them to determine whether you have (in their view) “excess income” to give away.
I suggest you search online for HMRC’s IHT403 form and complete the table on page eight. If you believe that you have excess income and, again, you can afford to give this away, you should certainly consider using this exemption. Given HMRC’s strict requirements here, you should take advice and keep detailed records (ideally using the IHT403 form), so that your executors can easily show evidence on your death.
Given your comments regarding a wish to give assets to your children (and if you are sure you do not need the funds), you may also consider entering into a “deed of variation” in respect of your US inheritance. If done correctly, from a UK tax perspective, it should be possible to direct your inheritance from the relative in the US to your children but avoid the seven-year rule.
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Again, and particularly with the cross-border elements involved, I would suggest you review this with a solicitor in the UK and the US to ensure that the various issues and requirements are brought together.
Finally, do make sure you and your wife are using up your annual gift allowances, worth up to £3,000 each a year. These gifts immediately fall out of your estate, so should not be forgotten about.
Tim Snaith is a partner at the London law firm Winckworth Sherwood. He advises on trusts, estates and succession planning.
