US-UK Estate Tax Treaty: Credit for UK Tax on US Assets

U.S. Estate Tax for Non-Resident Non-Citizens

When someone who isn't a U.S. citizen and doesn't permanently live in the U.S. dies, the U.S. might still tax their assets located within the country. This is called the U.S. Estate Tax. To be considered as permanently living, or "domiciled," in the U.S. for this tax, a person must have physically lived there and intended to stay forever. This is judged based on their specific situation and intentions, which is different from the test used to determine if someone pays U.S. income tax.

Generally, this U.S. estate tax only applies to assets considered "located" in the U.S. when the person dies. Examples include real estate in the U.S., physical items like furniture located in the U.S. (though art for exhibition might be an exception), and shares in U.S. companies. Things usually not considered U.S. assets include life insurance policies on the non-resident and certain bank deposits not linked to a U.S. business. The tax rates range from 18% to 40%. A major difference for these individuals is that they only get a $60,000 exemption from the tax, unless a tax treaty provides a higher amount. This is much lower than the multi-million dollar exemption available to U.S. citizens and permanent residents. If the value of their U.S. assets is over $60,000, their estate usually has to file a U.S. estate tax return (Form 706-NA). Because the exemption is so low, even having a relatively small amount of assets in the U.S. can trigger this tax. Tax treaties can sometimes help reduce this burden, for example, by offering credits for taxes paid elsewhere.

U.K. Inheritance Tax for Non-Domiciled Individuals

Similarly, the United Kingdom has an Inheritance Tax (IHT). This tax mainly depends on where a person considers their permanent home, known as "domicile," which is a legal concept different from just living somewhere or being a citizen. Everyone starts with a domicile based on their origins (often their father's), but can gain a new one by moving to another country with the clear intention to live there permanently. The UK also has a concept called "deemed domicile," meaning even if the UK isn't someone's chosen permanent home, they can be treated as if it is for tax purposes if they've lived in the UK for a long time. Currently, this applies if someone has been resident in the UK for 15 out of the last 20 tax years. This rule is planned to change from April 6, 2025, based on being a UK tax resident for 10 out of the previous 20 years.

People whose permanent home isn't in the UK (and aren't "deemed" to be) generally only pay UK IHT on their assets located within the UK. This could include UK real estate, UK bank accounts, or shares in UK companies. Assets like foreign currency accounts or overseas pensions are often not subject to UK IHT for these individuals. The standard UK IHT rate is 40% on the value of assets above a £325,000 threshold. It's possible for someone who isn't a U.S. resident to still owe UK IHT if they own assets in the UK or live there long enough. This could lead to a situation where the same assets are taxed by both the U.S. and the UK. The upcoming UK changes linking IHT more closely to residency might make this double taxation more common.

The U.S.-U.K. Estate Tax Treaty and Credit for Foreign Death Taxes

To prevent assets from being taxed twice by both the U.S. and the UK upon death, the two countries have a tax agreement, often called a tax treaty. The main goal of this treaty is to avoid double taxation and tax evasion related to estate and gift taxes. Article 9 of this treaty specifically explains how one country can give a credit for taxes paid to the other. For instance, the U.S. may allow a credit against its estate tax for the amount of UK tax paid under certain conditions, usually involving the person's connection to the U.S. (like being a citizen or having their permanent home there according to the treaty) and the type of property involved (like real estate or business assets). The UK offers similar credits for U.S. tax paid.

However, Article 9 also sets limits on these credits. A credit given by one country won't include tax that the other country didn't collect because it gave a credit. Also, the credit is limited to the amount of tax in the first country that is related specifically to the property being taxed by the second country. For someone who isn't a U.S. resident or citizen, the rules for U.S. credit might apply if the treaty considers their permanent home ("domicile") to be in the U.S., which might be defined differently in the treaty than under regular U.S. law. The treaty includes special "tie-breaker" rules to decide a person's single permanent home for treaty purposes if both countries claim them. Where the treaty decides the permanent home is located greatly affects which country taxes first and how these tax credits work.

Calculation of the Pro Rata Credit

The treaty doesn't give an exact formula for calculating the specific credit amount for a non-U.S. resident paying UK tax on their U.S. assets. But Article 9(4) indicates the principle: the U.S. credit is capped at the portion of the U.S. estate tax that relates to the U.S. property for which UK tax was paid. This suggests calculating the credit based on proportions. You would likely figure out how much UK IHT was paid specifically because of the U.S. assets, and then claim a U.S. credit for that amount, but no more than the U.S. tax actually due on those same assets. Because there isn't a precise formula given here, looking at the full treaty text and any official instructions from the U.S. (IRS) and UK (HMRC) tax authorities is necessary to know the exact calculation method.

In summary, the U.S.-U.K. tax treaty offers a way for non-U.S. residents to potentially get a credit against U.S. estate tax if they also paid UK Inheritance Tax on their U.S.-based assets. Calculating this credit involves finding the UK tax related only to those U.S. assets and is limited by the U.S. tax on the same assets, according to the treaty rules (Article 9(4)). Whether this credit is available depends on factors like the person's permanent home status under the treaty and the specific assets involved. Since international tax laws are complex and can have major financial consequences, it's strongly advised that non-U.S. residents affected by these rules consult with a qualified tax advisor who specializes in U.S. and UK cross-border estate planning.