Bequests and gifts from US expatriates to be taxed

Monday, 14 September 2015

Gifts and inheritances from people who have renounced their US citizenship are about to be subjected to US gift and estate taxes, under new Internal Revenue Service rules.

Such transfers have been taxable in principle since the enactment of the Heroes Earnings Assistance and Relief Tax Act of 2008 (HEART). This introduced two new tax provisions: an exit tax on US persons who renounce their citizenship or residence entitlement ('green card'), and a tax on gifts made by such unpatriotic persons to US recipients.

The exit tax – s.877A – has been in effect since 2009, but regulations to implement the s.2801 gift/estate tax have never been made and so it has not been enforceable until now.

Current estate and gift tax regulations allow a foreign person to make a tax-free gift to a US person, provided the asset is not sited within the US. High-value gifts and interest in foreign estates have to be reported to the IRS but are still not taxed. In future, they will be – even if the donor or deceased person paid the s.877A exit tax on renunciation.

Gifts or bequests to a US-resident spouse or charity are exempt. Life insurance policy benefits appear not to be.

The bringing into force of HEART s.2801 is probably prompted by the rapid increase in the number of US citizens who have renounced in recent years, rising last year to a record 3415. Much of this, though not all, is due to Washington's increasing tough enforcement of foreign asset taxation, culminating in the Foreign Account Tax Compliance Act, and the Justice Department's campaign against Swiss banks. However, many renouncers are people with very slim connections to the US and who do not wish to be subjected to its worldwide taxation system.

This flood of expatriate exits has already prompted the US government to increase the renunciation fee fivefold.

  • The new rules will not have retrospective effect, so only US citizens who renounced after the enactment of HEART on 17 June 2008 are affected. Comments can be submitted until 9 December and a public hearing will take place on 6 January.

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