THE INTERNATIONAL TAX ADVISOR
by: Douglas J. Kingston, CPA/MBA • Mailing Address:
2003 TAX CHANGES
PRESENT OPPORTUNITIES FOR U.K. INVESTORS IN
It is important for
In March 2003 the
Separately, in May 2003, the
Under U.K. domestic tax law,
overseas net rental income of an individual resident and domiciled in the
U.K. is subject to graduated tax at rates up to 40% (with deduction or credit
for U.S. income taxes paid, whichever is more advantageous). The U.K.-U.S. income tax treaty does not
The new U.K.-U.S. income tax treaty does not override
Gain on Disposition (continued)
gains tax is limited to a maximum rate of 15% for property held more than 12 months (the maximum rate is 20% for dispositions on or before that date). Gain attributable to prior depreciation is taxed at a maximum rate of 25%.
Under U.K. domestic tax law, net capital gain of a U.K.
resident or domiciliary (reduced by “taper relief” percentage up to 40%) is generally
subject to graduated tax at rates up to 40% with credit for U.S. income taxes
paid (limited to U.K. capital gains tax on the gain). Taxable gain is computed taking into
account the original cost of the property adjusted for inflation. The U.K.-U.S.
income treaty does not include the favorable “exemption with progression
rule” found in several other countries’ treaties with the
Under U.S. domestic tax law,
the value of U.S. assets of a nonresident decedent or donor is subject to tax
at graduated rates up to 55% after exemption of only $US60,000 (a U.S.
citizen or U.S. domiciled decedent is currently entitled to much larger
exemption of $US1 million increasing to $US3.5 million by the year 2006). Since the 1988 enactment of a harsh U.S.
tax law change effecting both U.S. and foreign decedents, surviving spouses
who are not U.S. citizens do not benefit from the unlimited marital deduction
available to U.S. citizen surviving spouses (unless a special purpose “qualified
domestic trust” is used). The
U.K.-U.S. estate tax treaty provides an election to use the larger exemption
Under its inheritance tax law,
the U.K. taxes the value of the worldwide assets transferred at death or
within the prior 7 years by decedents domiciled in the U.K. at a 40% rate
after a £255,000 exemption (currently about $432,000). Transfers to a surviving spouse are exempt
from tax provided both spouses are domiciled in the
This article considers U.S. Federal, but not U.S. state and local income and transfer taxes. Also not discussed are alternatives for avoiding U.S. estate and gift taxes and probate by using a separate legal entity or entities to own U.S. real estate. U.K. investors in U.S. real property should be aware of these issues and plan their investments accordingly in order to reap the maximum tax savings.
Douglas J. Kingston is an Arizona certified public accountant (CPA) specializing in international tax planning and compliance for U.S., Canadian, European, Latin American and Asian business and individual clients and may be reached by: