HOW THE U.K. TAXES GIFTS
Nov. 17, 2017
In the U.K., taxes on estates are handled differently than in the U.S. They also tax gifts differently.
The recent death of Bruce Forsyth, a television personality in the U.K., is a good opportunity to show how the U.K. and the U.S. treat taxes on gifts and estates differently.
In the U.S., we have an estate tax on estates that exceed the exemption amount. Currently, that amount is $5.49 million per taxpayer (increasing to $5.6 million on Jan. 1, 2018). The estate must pay tax on the value above the exemption amount before any assets are distributed to heirs.
The U.K. has an inheritance tax. Instead of taxing the entire estate, they tax what the heirs receive after the estate is distributed.
Forsyth disliked the British system, so he avoided it by leaving everything to his wife who has a full “spousal” exemption from the inheritance tax. She may be able to give all of Forsyth's descendants a share of the estate without anyone ever having to pay taxes on it, as the Wills, Trusts & Estates Prof Blog discusses in "Should We Tax Gifts the British Way?"
In the U.S., we have limits on the amount that may be gifted away before a person dies. Why? It is done so those with potentially large estates cannot avoid taxes by giving everything away while they are living.
The U.K. only taxes gifts if they occur within seven years of the giver's death. If gifts are made within that timeframe, then the gifts are considered part of the estate and subject to the inheritance tax.
Therefore, if Forsyth's wife lives for least another seven years, then she can give everyone a large inheritance from Forsyth with no tax being owed.
Reference: Wills, Trusts & Estates Prof Blog (Oct. 24, 2017) "Should We Tax Gifts the British Way?"