Gifting Shares to family before returning to the UK - A tax loophole?

This sounds too good to be true, but my accountant thinks it's valid. Has anyone gifted shares as a US citizen to a UK resident before they (the US citizen) becoming UK tax resident, with the result that nobody had to pay any tax (including capital gains on the gifted shares)?

The loophole goes like this:

• While US resident and before I become UK tax-resident, I gift $15,000 in shares to my brother (who the US recognizes as a non-resident alien living in the UK)
• There is no US gift tax US because stocks are intangible property and exempt from US gift taxes
• The UK does not have a gift tax, only inheritance tax, and that doesn’t apply unless I die within 7 years of gifting
• I pay no capital gains to the US because under US law the capital gains is (a) delayed until the recipient sells the stock and (b) paid by the recipient not me
• I pay no capital gains in the UK because I am not UK tax-resident
• My brother pays no capital gains in the US when he sells as the US does not tax capital gains on US stocks held by non-resident aliens. The fact he inherited my cost basis doesn’t change this.
• When my brother sells, he only has to pay the UK capital gains on the gain since the date of gifting (and even if we’re wrong on this, there's a generous UK £12,300 a year capital gains allowance my brother isn't using).
• Net result, I just gifted my brother $15,000 and nobody had to pay anything in taxes. If I'd had to pay capital gains and NIIT, I'd have needed to start with $19,320 to end up with him getting $15,000

Note that while my brother could then gift me back the $15,000 tax free (since the UK doesn't have a gift tax, and US taxes the giver not the receiver), I'd fall foul of something called the the step-transaction doctrine. Same thing stop me hiring 100 UK residents and offering them 5% to join my tax evasion ring!

My brother will need to set up a brokerage account and file a W8-BEN, but that's all that's required on his side. I'm still researching what's paperwork is required on my side by my brokerage (Fidelity) to transfer shares to someone without an SSN or ITIN is something their help page on gifting shares doesn't cover.

That sounds perfectly correct to me and there are rumors now and again that the gifting of shares with the uplift  in basis will be changed, but this loophole benefits most US politicians so it will probably never be changed.

There is no gift tax in the USA. Each person can gift up to $15k (actually more than that now as it is indexed) without any reporting. If you gift more than $15k then you have to file form 105 (?) to report it and it gets subtracted from your lifetime allowance of over $11m which is not a problem for most individuals.

As you say, in the UK, there is no gift tax or reporting but the clock starts ticking so if you die within 7 years then the gift will be added to your estate and some tax paid. (After 3 years the tax drops from 40% and reduces each year until it reaches zero after year 7).  Also in the UK you can gift as much as you can afford out of annual income without it being counted towards inheritance tax.

If you gift more than $15k then you have to file form 105 (?) to report it and it gets subtracted from your lifetime allowance of over $11m which is not a problem for most individuals.

I dream of having such problems :-)

Thanks DurhamLad.

I dream of having such problems :-)

Thanks DurhamLad.

Yes, that would be a nice problem to have. 

I checked that gift tax form and it is actually IRS form 109, not 705.

https://www.irs.gov/forms-pubs/about-form-709

For the benefit of the thread / anyone Googling this topic:

Ran into a problem when I attempted to execute on this. When I spoke to my US Broker (Fidelity) they said it was not possible to transfer shares directly to a non-resident alien. They suggested the following steps as a workaround:

• I create a new Joint Account in my US Brokerage, and name my brother on it (apparently only one signee needs to have an SSN (i.e. me) and my brother's paperwork is a printed form, it can be scanned and emailed).
  
• I transfer the shares to the joint account. This is allowed because my name is on both accounts.
  
• My brother transfers the shares from the joint account to his UK brokerage account. This is allowed as his name is on both accounts.
  

They estimated two weeks for step 1 & 2, but a whooping 6+weeks for step 3 to complete!

My own investigation leads me to thing this still avoids all taxes, but for the life of me I can't work out whether my brother's cost basis will be the fair market value (FMV) of the shares at the time they were transferred into the joint account, the time when they were transferred out of the joint account, or the time when they arrived in his UK account.

Anyway, I've thrown it all over the fence to my tax adviser. I'll update the post when I hear back.

I look forward to hearing what your tax advisor has to say.

With a joint account you will receive a 1099 for any dividends and cap gains that the investments pay out. As a joint account I would expect each account holder is responsible for half and therefore only taxable for half.  If the other account holder has no SSN or TIN that seems to be a way of evading taxes since the copy of the 1099 will go the IRS who would be expecting each account holder to be responsible for the taxes due.

I know that what you are suggesting is that all these transfers are done before any distributions are made so no tax due, but as a general rule I am amazed that joint account holders don't both need a SSN or TIN.  Maybe if there is only one account holder with a SSN then he is responsible for all the taxes and that is obvious from the 1099s issued.

Maybe if there is only one account holder with a SSN then he is responsible for all the taxes and that is obvious from the 1099s issued.

That's basically what happens. If what I've read on the internet (example this article) is correct,  the IRS issues just the one 1099 (for the full amount) to whoever is listed first on the joint account. That person must have an SSN as this is a requirement for setting up a joint account in the first place. It doesn't matter if the other holders have SSNs or not, only one 1099 will be issued, and it's issued to the first listed holder. This first person is then responsible for (a) informing the other account holder(s) of their portions, (b) paying just their own portion on their tax return, (c) supplying details of all this (including who the other holders are and their portions) on their tax return.

However, it's perfectly legal & acceptable for that first account holder to just pay the lot and skip all the above, which is what I would do in this scenario. (While my intent is to time things so no dividend is paid during the transfers, that's just to keep things simple. The stock only pays a token dividend each quarter (0.2% rounding up!) so even if I gift the $15,000 limit, we're only talking about $6 in total taxes between the two of us).

That's basically what happens. If what I've read on the internet (example this article) is correct,  the IRS issues just the one 1099 (for the full amount) to whoever is listed first on the joint account. That person must have an SSN as this is a requirement for setting up a joint account in the first place. It doesn't matter if the other holders have SSNs or not, only one 1099 will be issued, and it's issued to the first listed holder. This first person is then responsible for (a) informing the other account holder(s) of their portions, (b) paying just their own portion on their tax return, (c) supplying details of all this (including who the other holders are and their portions) on their tax return.

However, it's perfectly legal & acceptable for that first account holder to just pay the lot and skip all the above, which is what I would do in this scenario. (While my intent is to time things so no dividend is paid during the transfers, that's just to keep things simple. The stock only pays a token dividend each quarter (0.2% rounding up!) so even if I gift the $15,000 limit, we're only talking about $6 in total taxes between the two of us).

Thanks for that. I learn something new every day.

I look forward to hearing what your tax advisor has to say.

He said the addition of a Joint Account and routing through it doesn't change anything - the gift is still entirely tax free for both giver and recipient.

It took me a while to update this thread because there another question came up: When it can take 3 weeks for shares to transfer from the US to the UK, what date(s) should be used when determining FMV & Cost Basis?

I was told it's unclear, but their recommendation was to use the date the shares leave the joint account on the basis that this is when I lose control over them.

He said the addition of a Joint Account and routing through it doesn't change anything - the gift is still entirely tax free for both giver and recipient.

It took me a while to update this thread because there another question came up: When it can take 3 weeks for shares to transfer from the US to the UK, what date(s) should be used when determining FMV & Cost Basis?

I was told it's unclear, but their recommendation was to use the date the shares leave the joint account on the basis that this is when I lose control over them.

Thanks for reporting back. It sounds like you are on solid ground to go this route.

Update from almost 2 years on!

Short Version:
It worked, and we avoided around thousands in taxes.

Long Version:
It wasn't completely smooth sailing. There were yet two more problems and the dust only finally settled last month. Those issues were:

1. Transferring the Shares
As discussed at length either in this thread, my broker (Fidelity) won't transfer shares from a US resident (i.e. me) to a non-resident alien (i.e. my brother) directly. They recommended setting up a 3 step process: Set up a joint account with my brother, transfer the shares to the joint account, and from there into my bother's account.

Only Fidelity don't support joint accounts with non-residents. Nor do any of the other brokers we contacted over the next month with the exception of Interactive Brokers. They don't seem to care much as long as the initial application has a US residents SSN associated with it.

So we set that up and I transfer the shares to the joint account. I have to visit a Fidelity branch in person with ID and jump through some in-person hoops to do this, but there's no pushback or problems. We try to transfer the shares to my brother Interactive Brokers UK account only to have the UI block us. We contact support, who don't have a clue, but we keep at them until we finally get an answer: They don't allow share transfers from accounts where ALL the names on the accounts aren't on the destination account. So you can never transfer from joint accounts to individual accounts.

So we have another chat with my tax advisor, have my brother hit the sell button, and move the proceeds into his UK account. Interactive Brokers have no issue with that. For the paper trail and the suspicion my brother would be slow to reinvest the money, I'd have preferred him to have the shares rather than the cash, but that was no longer an option.

(It then took something like 4 months to close the empty joint account, because for some reason Interactive Brokers thought there was something still in there. As you've probably gathered, I've not been impressed by Interactive Brokers).

2. IRS Initially wanted 50% of the tax avoided
While the notes field in my 2022 tax return (filed April 2023) explained why the sales should not be a taxable event for me, I got a letter from the IRS in the middle of June 2024 titled 'Your tax return does not match the information we have on record'. It says I need to either pay 50% of the capital gain from the sale or supply a signed statement explaining items not agreed with' along with supporting documentation. Both my tax advisor and I think this is just an automated response and no human has looked at the comments put on my tax return. I don't want to pay the tax advisor even more money, so I decide to at least handle the initial appeal myself as it appeared straightforward.

So I send the IRS the signed statement (short and sweet, as per my tax advisor's recommendation), include copies of the 2022 gift form, the signed statement my brother and I filled out at the time transfer share transferring withing the shared account to him (something the tax advisor told us to do at the time), and a copy of the e-mail from the tax advisor saying we had a clear history of correspondence with his firm showing all this was a genuine attempt to gift shares. I was able to file all this with the IRS electronically through their portal, which is better than the 5-6 weeks the postmarks on their letters were showing it was taking for the IRS letters to reach me.

6 weeks later, I get a letter from the IRS saying they need 90 more days to respond, but it's actually only a month later I get the all clear. They've accepted my position and no tax is owed.

I attempt to keep things simple, I know that's pretty difficult for cross border tax and finances, so I'm rather glad that I have my money in US mutual funds and ETFs that I simply can't transfer to UK relatives. If I had shares I'd be tempted by this approach. Right now I just give cash to my UK relatives which I do by wire transfer that completes in a day. Probably not the most tax efficient, but it is very simple as neither HMRC nor IRS even need notification as long as the amount per person is less than $18k.