To block or not to block – that’s (just one of) the question(s)

This depends to a great extent on the goals and plans of an investor, settlor, or beneficiary, and the reasons for doing so. 

While it is possible for non-resident aliens to achieve mitigation, and even elimination, of certain aspects of taxation in relation to US real estate, there is no single optimal structure. 

Mitigation achieved in one regard may be neutralised by a charge to taxation in others. Whether a non-resident should consider purchasing US real estate directly or through a trust structure and/or a “blocker” corporation requires detailed qualified analysis. 

Are there ANY advantages of a corporate structure for holding US real estate by non-US citizens? 

Yes. Individuals who are tax residents in countries that do NOT have a double tax treaty (DTT) with the United States will normally be liable for US inheritance tax at 40% on real estate values in excess of USD 60,000.

This is, of course, a very low threshold and it should be noted that the US has less than 70 DTTs.

It is possible to use a double corporate structure comprising a US LLC which is used as the registered owner, and a so-called “blocker” company which could be located in Gibraltar or another tax neutral jurisdiction in order to mitigate the application of US inheritance tax. 

The US-based LLC, owned by the blocker, must disclose in its filing that it is owned by a foreign entity.

On death of the beneficial owners of the blocker, their estates are not chargeable to US inheritance tax since the blocker entity continues to exist. 

Generally, individuals who acquire real estate in the US in their own names, and who are resident in countries that do have a DTT with the US, will pay the same rates of tax as if they were to purchase via a company or a double corporate structure.

Corporations pay at 21%, and individuals at zero to 37%, which is notionally high; but with depreciation taken into account, actual tax can be reduced for individuals. 

Under DTTs, the US grants generous exemptions to non-US beneficial owners reporting global assets of their estate. 

Rental income of corporations is generally taxed at 21%. If the real estate is held by individuals, it is taxed at various rates from zero to 37% on taxable income exceeding USD 13,450 (as of 2022), so there is scope for some planning in using a structure. 

The US grants allowances with respect to rental expenses, including mortgage interest and depreciation, which assist in decreasing the taxable base. 

There is no magic solution but non-US citizens looking to protect that part of their wealth invested in the United States from US inheritance tax should at least give offshore structuring some thought and not rule it out a priori.

Finally, consideration should be given to how a foreign trust above the blocker entity may assist with the tax-efficient distribution of the assets.

Though this be madness, yet there is method in ’t.

As CEO, Christopher Pitaluga insists on an unparalleled commitment to client service across all of Abacus. Chris combines a high-octane level of enthusiasm and energy with the aspiration that excellence is at the core of all that we do. Chris is an Associate of the Chartered Institute of Bankers (now the London Institute of Banking & Finance) and is a founder member of STEP.