Could You Be Heading For A US Estate Tax Bill, By Holding US Stock?

The Often Unknown Tax Liability Facing Foreign Investors in U.S. Equities.......


Many investors assume that the US federal estate tax only applies to those domiciled or resident in the US, or on investments physically located in the U.S. and so will associate this solely with owning property such as a holiday home—but they are wrong.


If you hold US equities this article is with a read..................

One tax which applies irrespective of where you live, is US Estate Tax. If an investment in US shares or other US situs assets is not structured properly and the amount exceeds $60,000, the Internal Revenue Service (IRS) can take up to 40% of the fair market value at the time of death, in Estate Tax.


For example, if you have a stockbroking account in London, through which you purchased Apple shares, the fact that Apple was incorporated in the US means that those shares would qualify as a US asset in the event of your death.


Let's take some other major players. If you hold stock in Facebook, Amazon or Tesla. These companies were all incorporated in the US. Therefore, if not structured properly, as they qualify as US situs assets, they may be applicable to US estate tax charges.


US domiciliaries are subject to estate and gift taxation at a maximum tax rate of 40% . Non-US domiciliaries are subject to US estate and gift taxation with respect to certain types of US assets, also at a maximum tax rate of 40% but with an exemption of $60,000, which is only available for transfers at death.


Many Non Resident Aliens (NRAs) are not aware of or informed about the US estate tax exposure of 40% on all investments in US securities. As a result, the Non Resident Aliens (NRA’s) surviving family is often surprised by the application of the US Estate Tax to the NRA family’s investment in US securities (and other deemed US-situs assets, e.g., US real estate), which results in a high administrative and US tax burden for the heirs.


During the NRA’s lifetime, there is a general belief that the US estate tax will not apply, or that the IRS will not discover that the NRA held the US assets. To the shock of the NRA’s heirs, the most likely to take action to enforce the US estate tax is a non-US bank (which is not that surprising these days). With the Foreign Account Tax Compliance Act (FATCA) in place since July 2014, many non-US banks are beginning to enforce the US estate tax against unsuspecting NRA clients who only too late discover that the US will apply a 40% estate tax to the entire lot of US property.


Where U.S. Estate Tax does not apply

So despite not living in the US investors will generally be subject to Estate Tax on U.S. situated assets, such as securities of U.S. companies. However, there are some assets that are exempt, which generally include:

  • Securities that generate portfolio interest (e.g., U.S. treasury and U.S. government agency securities

  • Certain U.S. corporate bonds and U.S. commercial paper,

  • Dividend income from certain foreign corporations

  • Offshore Mutual Funds with different domiciles


In the case of mutual funds. Vanguard for example offers two separate S & P 500 Index tracker ETFs, and each has a different domicile:


· VOO, provided by Vanguard US, domiciled in the US and traded on US exchanges


· VUSD, provided by Vanguard in Europe, domiciled in Ireland and traded on the London Stock Exchange and other European exchanges



Both of these ETFs hold the same underlying stocks, and so the return to investors from them should be exactly the same (excluding perhaps a tiny offset due to any small difference in annual charges). So why do Vanguard do this? Surely an investor could choose either at will and get the same results?


The answer is US taxes. Despite investing in identical underlying assets -- that is, not just asset class, but actual assets -- investors in varying personal 'tax circumstances' will get different results depending on which of these two ETFs they choose to hold. Sometimes wildly different.


Between the extremes lies a whole spectrum of outcomes. For non-US investors, there is a decision of whether to hold your investments through the usual Vanguard ETFs discussed by and used by US investors, or whether to hold them through different ETFs -- specifically, non-US domiciled ones. Typically for nonresident aliens, it is far better to invest in the ETFs domiciled in other jurisdictions, over those domiciled in the US.


Do I have to file a Federal tax return?

It depends. If the home country has any income, social security or transfer tax treaties with the United States, the treaty rules can mitigate double taxation. The home country laws also may grant tax credits for U.S. taxes paid. A tax advisor in your home jurisdiction can provide additional information.


Estate tax treaties may exempt brokerage accounts for nonresident aliens or provide higher exemptions from the tax. U.S. Brokers are not responsible for estate tax compliance, so it’s a tax matter for nonresident aliens and their tax advisors. Brokers require a conclusion of IRS estate proceedings before releasing assets from the account of the deceased.


A limited number of countries have estate tax treaties with the U.S. that eliminate certain types of asset situated in the U.S. from the 40% estate taxation. Only the following countries have estate/gift tax treaty with the U.S.: Australia, Austria, Denmark, Finland, France, Germany, Ireland, Italy, Japan, Netherlands, Norway, South Africa, Sweden, Switzerland, and the United Kingdom. Even for those countries reduction of tax exposure is only partial.


Nonresident aliens should learn how repatriation of funds work on death; they might have delays due to probate of the estate and getting IRS estate tax clearance. By opening a U.S.-based brokerage account, it lands the account in the U.S. (Nonresidents holding U.S. securities in a foreign brokerage accounts must count those U.S. securities in a U.S. estate.)


The 1979 bilateral tax treaty between the UK and the US that covers transfer taxes (i.e. US federal estate, gift, GST, and UK IHT) broadly gives rise to the following consequences:

  1. Exclusive taxing rights are given to the country of the individual’s domicile, with the exception of Article 6/7 property (i.e. real estate or permanent establishment property)

  2. The non-domiciliary country can still subject its citizens to transfer tax according to domestic law, and

  3. Double taxation should not normally arise under tax credit provisions.

(Learn more about nonresident alien accounts income and estate taxation on Schwab’s Website and Schwab’s U.S. Tax, and Estate Disclosure to Non-U.S. Persons.)


How can taxes be mitigated if a Double Taxation Agreement does not apply and I want to hold US stock or Mutual funds?

So as a reminder, U.S.-situated assets include American real estate, tangible personal property, and securities of U.S. companies. A non-resident’s stock holdings in American companies are also subject to estate taxation..


For all of the above cases, whether or not the investments are held inside a pension or other tax-mitigating wrapper may create further significant differences to the tax results. And for investors who have or plan an international lifestyle, moving into or out of the US can create large and damaging discontinuities in tax treatment.


An offshore portfolio bond is another name for an offshore investment bond. It is a potentially tax efficient investment wrapper that can hold different assets, such as stocks and shares and mutual funds.


Where directly held shares are transferred to a portfolio bond, the transfer is unlikely to be liable to estate tax if the portfolio bond is regarded as non-US situs. For example if the portfolio bond is situs in the Isle of Man or Ireland. There are generally no US income tax or capital gains tax implications for a non US person transferring the shares.


Once the assets are held within the bond, the previous owner is deemed to have relinquished all legal and beneficial rights to the assets and therefore on death, the value of the shares are not assessable to US estate tax.


Non-US citizens who own property in the US including US securities, need to have a clear understanding of the potential implications of the US estate rules As, residency and domicile choices can have major tax implications.


An international estate planning professional should be consulted to help you determine any potential impact and develop an approach based on your specific circumstances.


If you would like to find out more you can contact me here


NB: This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice.



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