US revocable trusts, also known as living trusts, are a popular estate planning tool in the United States. They offer a straightforward way to avoid probate, allowing the grantor to retain control over the trust assets during their lifetime. However, for those with connections to Scotland, these trusts can present significant challenges.
Understanding US revocable trusts
A US revocable trust is a legal arrangement where the grantor or settlor transfers their assets into a trust while retaining the right to revoke or amend the trust during their lifetime. The grantor typically serves as the (often sole) trustee, managing the trust assets, receiving any income generated by the fund and having a right to access the capital. The grantor will usually have the power to revoke the trust during their lifetime. The trust will then become irrevocable on the death of the grantor and the assets will be distributed in accordance with the terms of the trust. From a US perspective, the trust is tax neutral (in the same way as a bare trust would be here) and the assets are treated as though they belong to the grantor.
However, for those with connections to any of the UK jurisdictions, including Scotland, revocable trusts can give rise to significant issues and should be approached cautiously.
UK inheritance tax complications
For those who are subject to UK inheritance tax on their worldwide assets or who own UK situated assets that are subject to UK IHT, creating a revocable trust could give rise to immediate tax complications. Trusts in the UK, including in Scotland, are generally subject to a set of IHT rules known as the "relevant property" regime. An immediate charge to inheritance tax of 20% followed by charges up to a maximum rate of 6% on each of the trust's 10-year anniversaries as well as proportionate charges when capital is advanced from the fund may be levied on the fund, subject to its overall value and the availability of any reliefs and allowances.
Whether a US revocable trust forms a part of the relevant property regime and is subject to UK inheritance tax depends on the way in which it is drafted. US revocable trusts can sometimes be "bare" trusts and if so, they will receive neutral UK tax treatment much like in the US. However, even if a US revocable trust is tax neutral in the UK, the nature of the trust can change if the grantor dies or loses capacity and can no longer revoke the trust. If the grantor is subject to UK IHT on their worldwide assets, loss of their capacity may give rise to the tax consequences described above even if the trust was "bare" beforehand.
Trustee residency and tax obligations
If the trustee of a US revocable trust is a UK resident, the trust may be considered a UK-resident trust, bringing it under the purview of UK tax. UK resident trusts are subject to UK income and capital gains tax as well as taxes in the US (though there may relief available under the US/UK double tax treaty). The trust (even if it qualifies as a bare trust) may need to be registered on HMRC's Trust Register, adding another layer of administrative complexity.
Challenges for UK resident beneficiaries
UK resident beneficiaries of US revocable trusts face their own set of challenges. Income distributions will generally be subject to income tax in the UK. Capital distributions (made for example, on the death of the grantor) may give rise to significant UK tax charges if paid to UK resident beneficiaries. The availability of tax credit under the US/UK double tax convention will depend on the circumstances.
While US revocable trusts offer significant benefits in the US, they can pose substantial issues for those with connections to Scotland. The potential for high tax liabilities, and complexities arising from trustee or beneficiary residency make these trusts problematic. It is crucial for anyone with connections to Scotland (or any of the other UK jurisdictions) considering a US revocable trust to seek expert legal and tax advice to navigate these challenges effectively.
When preparing for an overseas move to the UK from the US, it is important to note the unique elements of estate planning that differ between countries. Brodies wills and estate planning lawyers can advise on Scottish tax and succession matters, as well as English wills and probate. Our personal law team are highly experienced in advising individuals who have connections in the US and UK, and we regularly collaborate with professional advisors in the US and elsewhere to provide comprehensive advice in this area. To speak with a member of our team, please get in touch.
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