Inheritance tax on property assets held in USA

[swanie]

I have a question related to inheritance tax on overseas investment property. I am a UK resident/citizen with rental investment properties in the USA. I account for the USA income on a US tax return and in my UK tax return, with a foreign tax credit deduction for any tax paid in the US.
My question relates to the way these properties would be regarded in the USA for inheritance tax purposes?
My understanding is that there is no spousal exemption for foreigners in the US, and therefore the entire value of these assets, together with any other assets in the USA (such as bank accounts) would attract US IHT, irrespective of the way my Will might be drafted (ie. for the benefit of a spouse).
If that is the case, what rate of tax would be claimed in the US and would my estate in the UK be able to set this sum against UK IHT liability (if any)?
Any assistance would be very much appreciated.

[DavidTreitel]

From an income tax perspective it is unusual to owe any US tax on US rental activities. Has the net election been made on a timely basis from the first year that the property was placed in service as a rental property?

[maths]

I believe for Federal Estate and Gift tax there is an unlimited marital deduction. Hence no such tax on death on inter-spouse transfers.

[swanie]

Many thanks for the responses. In answer to the comments: to clarify, I have always paid US tax on the income from the rental properties since I have owned them and included the income in my UK return with a deduction for the tax paid in the US. I have owned US properties for over 10 years.

Regarding the gift tax referred to, my understanding was that there would be no allowance in the USA for any gifts or inheritance provision to a spouse of a foreigner. This is the point I am trying to clarify as it is fundamental to my inheritance tax planning.

[darthblingbling]

I believe there is a rule in the US that non residents are taxed at 30% of their gross rental income and are not allowed a deduction for expenses, unless they make a 'net election' which allows them to be taxed on rental income less expenses, with one major expense being depreciation which I guess may be why seeing a profit is rare.

I believe then that the depreciation (whether actually claimed as an expense or not) is added back on to the proceeds when the property is disposed of. Not sure if this impacts for IHT however.

I'm not an IHT expert, but I believe if you are UK domiciled your worldwide assets are within the estate liable to UK IHT. The UK has a treaty with the US for estate taxes so I assume you'd either get a credit if tax is also due on the asset in the UK or it may be exempt in the US under the treaty. If no tax is due in the UK on the asset then it may be the case that no relief is available, but you'd need to consult the treaty to determine how relief will.be provided on the asset.

[DavidTreitel]

I agree entirely with the previous reply. It is rare, very rare, to owe US income tax on source rental income after depreciation is claimed. To find out if you are entitled to claim any expenses at all in the US, you'd want to look at Schedule OI filed as a part of the 2022 Form 1040-NR and see if Line M has a tick (or check mark if you prefer American English) at Line 2.

[swanie]

I’ve checked the US tax return and there is a tick on Schedule OI, Line M, line 2, and every year tax is paid in the US based on the net rental income after expenses and depreciation. In the UK the depreciation is removed from the calculations and the profits are taxed as if the income were made in the UK, with an allowance for tax already paid in the USA.
Capital gains on property sales are paid in the US, and re-calculated as if the gain were made in the UK, again with an allowance for tax paid in the US
This being the case, does it have any effect on the way these assets would be treated for the purposes of IHT in the US?

[Integraoutsourcing]

In the USA, the estate tax applies to the transfer of property at death. Non-U.S. citizens and non-U.S. residents are subject to U.S. estate tax on their U.S.-situated assets, including real estate, regardless of whether the property generates income or not. The current estate tax exemption for 2023 is $12.06 million per individual, and the top tax rate is 40% (subject to change).

As you mentioned, no unlimited spousal exemption exists for non-U.S. citizen/non-U.S. resident spouses. However, a marital deduction allows for the tax-free transfer of assets to a U.S. citizen spouse. If you were to pass away, and your spouse is not a U.S. citizen, the marital deduction would not be available, and the value of the U.S. assets in your estate could be subject to U.S. estate tax.

Regarding the interaction between U.S. estate tax and UK inheritance tax, the United States has estate tax treaties with certain countries, including the UK. These treaties aim to prevent double taxation and provide relief in some situations. Generally, the treaty provisions would determine the taxing rights of the two countries over the same property.
For more info check globalintegra.co.uk

[swanie]

That’s really helpful – thankyou.