US/ UK Tax Treaty

By Anthony Allsopp, Head of Business at Title Research

We wrote recently about the rising trend of US assets being held in UK estates and we explored if that trend is increasing. The abridged summary is that yes it does seem to be on the up, and our view is that it's likely to continue for varying reasons. With this in mind, what challenges might this present to Personal Representatives (PRs) who are perhaps not familiar with administering assets held in the US and US/ UK Tax Treaty.

Types of US assets

Firstly, let’s examine what types of US assets commonly occur in UK estates:

Computershare, EQ: By far the most common asset that we encounter is US shareholdings, typically held with the following transfer agents (the US term for a share registrar).

Whilst this scenario is most common, we are also encountering a trend of holdings being held via US investment companies. Examples of these include:

Morgan Stanley
Fidelity
E-Trade
Charles Schwab

Where do you begin?

Sticking with the most common scenario, if as a PR you are aware that such assets form part of the UK estate, where do you begin? This depends on the evidence held for these holdings:

The best case scenario is that you hold statements from the transfer agent dated within six months which clearly denote the account holder's name, address, shares owned, number of shares, and how they are held. From this, a date of death calculation can be conducted and it can be established whether the tax treaty is applicable – more on this later in the article.
In the worst-case scenario, you may hold an aged share certificate or correspondence from a transfer agent that again, is dated and perhaps doesn’t denote the account number or any other information about the shareholding (for example, it could be an AGM letter or general portfolio performance summary of the company). In this scenario, we would recommend verifying the holding/s with the transfer agent to establish the information required to value them.

What is the tax treaty between US and UK? If the combination of US assets forming part of the UK estate exceeds $60,000, then the tax treaty is triggered. For practitioners unfamiliar with the treaty, it can be confusing as the transfer agents aren’t particularly helpful in signposting this in their standard correspondence. They may suggest in writing that a holding can be transferred by completion of transfer forms even if the value does exceed $60,000.

To note: transfer agents will not examine the holding to ascertain its value nor will they consider the date of death value as it is not their purview.

If you were to unknowingly complete transfer forms, and obtain a Medallion Signature Guarantee, which can both attract a cost and then submit to the US, they would be rejected causing delay to the UK administration. What the transfer agent will be expecting to receive in support of the transfer forms is a Federal Transfer Certificate (Form 5173).

Federal Transfer Certificate (Form 5173)

The treaty in place is designed to prevent double taxation of a deceased’s property. Assuming the deceased was domiciled in the UK at death and was not a US resident during their lifetime, then it is unlikely any tax is due as a result in the US. However, the Inland Revenue Service (IRS) and the Government body that issues the Federal Transfer Certificate, will want to ensure that tax has been treated appropriately in the UK and that the US assets have formed part of any tax consideration here, whether due or not. To obtain Form 5173, an application must be made to the IRS and there is various supporting evidence of the UK estate that is required as well as completion of specific IRS forms.

Whilst we undertake this type of application regularly, the challenge to the UK estate is timescales. It currently takes 18-24 months to be issued. With this in mind and referring back to worst-case scenarios i.e. you hold aged evidence of the US asset/s and it has taken time, perhaps two to three months to verify the value and it is further established that IRS tax clearance is required, if it is also the last asset in the estate to administer then it means that your file is going to be open for several more years. As the IRS is the US equivalent of HMRC, it is not an entity that can be encouraged to expedite specific estates – it will take as long as it takes, and this can cause great frustration to parties in the UK, especially if the US asset/s form the bulk of the estate value.

Process almost complete

Assuming the application has been submitted correctly and Form 5173 has been issued to the estate, the holdings will become tax certified and the transfer agents will be notified of this. Once in possession of Form 5173, it can be used in support of the relevant transfer forms to effect a transfer of ownership – this process in isolation can take two to three months.

Once transferred and if it is the intent, holding/s can then be liquidated adding a further two to four weeks of administration time. All in all, it could easily take two to three years to resolve US assets that have triggered the US/ UK tax treaty. In this regard, our advice to practitioners if they believe the UK estate holds US assets, is to start considering the steps that need to be undertaken early on to try and mitigate the overall estate administration time.

Conclusions

Given these timescales, US assets can also be at risk of escheatment, a process whereby an asset can become dormant and pass to State ownership. We will examine this process in our next article.

Contact Title Research for help with asset repatriation services.

Topics: Repatriating assets, Estate, Overseas Assets, US Shareholdings