Tuesday, April 2, 2013
Geoffrey Todd (Partner at Boodle Hatfield, United Kingdom) and Amanda Edwards (Associate at Boodle Hatfield, United Kingdom) recently published an article entitled, The Pitfalls of U.S./UK Tax Planning, 27 Prob. & Prop. 60 (March/April 2013). Provided below is the introduction to his article:
A request for burial in a red suit, together with a copy of Dylan Thomas's poems, was enough to undo actor Richard Burton's longstanding estate plan to avoid UK inheritance tax. The UK Revenue service claimed that Burton's tribute to his Welsh origins indicated that he had retained his "emotional ties" with Wales. As a result, the UK Revenue Service successfully levied £2.4 million of inheritance tax (then known as capital transfer tax) on his estate, even though he had lived in Switzerland for more than 26 years.
Just as Richard Burton's plans unraveled on his death, lifetime planning also can be risky. This is especially the case when a U.S. attorney advises a client with UK origins or with strong connections with the UK on the possibility of creating a revocable living trust (RLT). At worst, the creation of a RLT can trigger an immediate charge to UK inheritance tax at 20%.
The key element that lies at the heart of the difficulties is the meaning and significance of "domicile" in UK law, and this is where the transatlantic misunderstanding begin. Domicile is absolutely crucial to the chargeability to UK inhertiance tax, just as nationality is to U.S. transfer taxation. Most people, however, will understandably equate domicile with residence. The assumption of both the U.S. adviser and the UK client may therefore be that only U.S. transfer taxes are relevant to dispositions of U.S. property.