US Estate Tax on US listed Shares on death?

sausage_time

Can anyone comment on the US/UK tax situation when a UK resident dies with a holding of US (NASDAQ) listed shares?  I see that US Estate tax may be due if the assets are worth more.than $60k.  But I have also seen some discussion that a double taxation treaty may apply?

EdSwippet

sausage_time said:

Can anyone comment on the US/UK tax situation when a UK resident dies with a holding of US (NASDAQ) listed shares?  I see that US Estate tax may be due if the assets are worth more.than $60k.  But I have also seen some discussion that a double taxation treaty may apply?

Assuming the deceased is domiciled in the UK and is not a US citizen, the US/UK estate tax treaty should apply; specifically, Article 5 paragraph 1(a), which seems to cover the above entirely:

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 other paragraphs in the article deal with niche cases such as trusts, Translated: the US generally cannot apply its estate tax to the vanilla US stock holdings of a deceased UK domiciled person.

Beyond this, even where Article 5 doesn't apply, Article 8 backstops by allowing a full marital exemption and also a US estate tax exemption up to the level the US allows to US citizens, currently just below $14 million.

Almost certainly no tax, then. However, depending on where and how these stocks are held - in a US based broker, say - there can be a requirement to file an intrusive form 706-NA with the IRS, followed by a (usually) lengthy wait for them to process it, all of which can add expense and delay when winding up an estate.

sausage_time

Very useful, thanks @EdSwippet.  

If the account and shares are in joint name with a spouse would Article 8 apply (and no tax due)?  Do I understand that correctly?

EdSwippet

sausage_time said:

Very useful, thanks @EdSwippet.  

If the account and shares are in joint name with a spouse would Article 8 apply (and no tax due)?  Do I understand that correctly?

The US has some extremely squirrelly rules around estate tax on jointly held assets, things like whether or not the residency country (UK) is a "community property" state or not, the extent to which one or the other of the owners can prove their share of contributions into the account, and so on, and it can under some circumstances "deem" the entire account to be the property of the first deceased for estate tax purposes.

However, none of this should come into play unless something about the estate fails the US estate tax treaty tests (for example, you own US real estate valued in excess of $14 million), and nothing in the treaty seems to differentiate joint and individually owned accounts. That said, this is something I've never looked at specifically - no personal need - so if you or your spouse do happen to own a Malibu beachfront property or a large factory in the US you need to research things beyond just relying on some random person on the internet.

Where do you hold these stocks? If in a vanilla UK platform - Hargreaves Lansdown, Halifax sharedealing, etc - then you'll likely escape having to deal with the IRS at all. The problem cases are where you hold stuff in a US provider. Interactive Brokers for example (don't confuse with Interactive Investor; no connection). Or icky cases such as US retirement accounts left behind from time spent working in the US.

sausage_time

Thanks once again.  At the moment most are with a US Stockbroker (Schwab) - a plain old brokerage account.  Some shares were "bed and ISA'd" into a Trading 212 ISA (in sole name obviously) and these are probably less visible to the IRS.  Outside of those shares the couple in question have no other interests in the US.

Perhaps transferring the remaining US shares to a UK broker could be a good recommendation.

EdSwippet

sausage_time said:

Thanks once again.  At the moment most are with a US Stockbroker (Schwab) - a plain old brokerage account.  Some shares were "bed and ISA'd" into a Trading 212 ISA (in sole name obviously) and these are probably less visible to the IRS.  Outside of those shares the couple in question have no other interests in the US.

Perhaps transferring the remaining US shares to a UK broker could be a good recommendation.

Schwab apparently follows the usual US broker practice of requiring a "transfer certificate" from the IRS for any US assets above $60k before it will release funds to an estate. The way to get this is as above, file a form 706-NA with the IRS and then wait up to 18 months or more.

Given that the UK has a decent US estate tax treaty, it's not clear whether Schwab would insist on following this process, as described in their general "non-US persons" documents, even though the US estate tax liability is known to be zero, or whether it would do something different (that is, less painful for all concerned) specifically for UK residents. Brokers are sometimes flexible, but they are also terrified of the IRS and if pushed, will prioritise CYA over customer friendliness.

If we're talking about less than $60k in stocks here, there should be no problem either way. If more though, or if less but just for general tidiness and safety and where moving these holdings to a UK platform is easy to do, then it's probably a good idea to do it. Even though they're probably fine where they are.

As a rule of thumb, the less direct contact you have - or anyone outside the US has, for that matter - with the US financial system and the IRS, the better. The IRS is particularly glacial, if not outright obstructive at times, when it comes to handling non-US investor issues. Moving these holdings as far away from IRS interference as possible will, if nothing else, help to eliminate any later delay and frustration if or when the time comes to administer the estate.
 

Cook_County

Filing Form 706-NA currently takes the IRS roughly 2 years to process. Because of the US government shutdown this will extend to 3 to 5 years. Filing of Form 706-NA as early as possible might help put the paperwork slightly ahead in the IRS queue.  Nonetheless without a Federal transfer certificate it may be tough to persuade a US broker to release securities to beneficiaries.