US and UK Estate and Gift Tax Considerations for a US Citizen Resident of the UK with US Assets

3.2. Taxation of US Citizens' Worldwide Assets:

A fundamental principle of US federal estate tax law is that US citizens are subject to estate tax on their worldwide assets, regardless of where they reside.⁴ This means that for a US citizen residing in the UK, their assets located in the US, as well as any assets they may hold in the UK or elsewhere around the globe, are potentially subject to US estate tax upon their death. This principle distinguishes US citizens from non-US citizens, who are generally only subject to US estate tax on their assets situated within the United States. The Internal Revenue Service (IRS) requires the estate of a deceased US citizen to be reported using Form 706, the United States Estate (and Generation-Skipping Transfer) Tax Return.⁷

3.3. Federal Gift Tax Rules and Exemption:

In addition to estate tax, the US also imposes a federal gift tax on lifetime transfers of property. For 2025, the annual gift tax exclusion allows individuals to gift up to $19,000 per recipient without incurring gift tax or utilizing their lifetime gift tax exemption.¹ This annual exclusion can be applied to as many individuals as the donor wishes each year.

The lifetime gift tax exemption is unified with the estate tax exemption, meaning that the same $13.99 million (for 2025) applies to the total of lifetime gifts exceeding the annual exclusion and assets transferred at death.¹ Gifts exceeding the annual exclusion amount reduce the available lifetime gift and estate tax exemption. For example, if an individual makes taxable gifts totaling $1 million during their lifetime, their estate tax exemption at death will be reduced by that amount. The federal gift tax rate mirrors the estate tax rate, reaching a maximum of 40% for taxable gifts exceeding the exemption amounts.²

There is an unlimited marital deduction for gifts made to a spouse who is a US citizen, allowing for tax-free transfers between them.¹ However, for gifts to a spouse who is not a US citizen, there is an annual exclusion, which is $190,000 for 2025.¹ Gifts exceeding this amount to a non-US citizen spouse may be subject to gift tax or utilize the donor's lifetime gift tax exemption. The interplay between the annual exclusion, the lifetime gift tax exemption, and the estate tax exemption is a critical aspect of US transfer tax planning, particularly for individuals with cross-border connections.

4. UK Inheritance Tax:

4.1. General Rules of UK Inheritance Tax and Application to Worldwide Assets for UK Domiciled Individuals:

The United Kingdom levies inheritance tax (IHT) at a standard rate of 40% on the value of an individual's estate that exceeds the nil-rate band.¹⁵ The current nil-rate band is £325,000¹⁵. For individuals considered domiciled in the UK for IHT purposes, this tax applies to their worldwide estate, encompassing assets located both within the UK and abroad.¹⁵ This means that if a US citizen residing in the UK is deemed domiciled in the UK for IHT purposes, their US assets will be subject to UK inheritance tax in addition to any potential US estate tax.

The nil-rate band can be increased in certain circumstances. If a qualifying residential property is left to direct descendants (children, grandchildren, etc.), the nil-rate band can increase to £500,000, incorporating the standard nil-rate band and the residence nil-rate band.¹⁵ Furthermore, if a person dies and their nil-rate band is not fully utilized, the unused portion can often be transferred to their surviving spouse or civil partner, potentially increasing the surviving partner's nil-rate band to £650,000 (or up to £1,000,000 if both residence nil-rate bands are also transferable).¹⁶ The significantly lower IHT threshold compared to the US federal estate tax exemption means that even individuals whose estates fall below the US exemption limit may still face UK inheritance tax liabilities if their worldwide assets exceed the UK nil-rate band.

4.2. Definition of "Domicile" under UK Inheritance Tax Law and the "Deemed Domicile" Rules based on UK Residency:

Under UK law, "domicile" is a legal concept distinct from both residency and nationality. It generally refers to the country that an individual considers their permanent home and intends to return to.¹⁵ This subjective determination is fundamental in establishing liability for UK inheritance tax under general legal principles.

However, the UK also employs "deemed domicile" rules for IHT purposes. An individual is considered deemed domiciled in the UK if they have been a UK resident for at least 15 out of the last 20 tax years.¹⁵ Once this residency threshold is met, the individual's worldwide assets become subject to UK inheritance tax, regardless of their actual domicile under general law. For a US citizen residing in the UK, understanding when they might reach this 15-year residency mark and become deemed domiciled is crucial for long-term tax planning. Another deemed domicile rule stipulates that an individual is considered domiciled in the UK if they had their permanent home in the UK at any time within the last 3 years of their life.²¹ This rule aims to capture individuals who have maintained a strong recent connection to the UK.

4.3. Upcoming Changes to UK Inheritance Tax Based on Long-Term Residence (effective April 2025):

Significant changes to the UK inheritance tax rules are set to take effect from April 6, 2025. The concept of domicile as the primary connecting factor for IHT on non-UK assets will be replaced by the concept of "long-term resident" status.²² This shift represents a fundamental change in how IHT liability is determined for individuals with international connections.

An individual will be considered a long-term resident if they have been UK resident for at least 10 out of the previous 20 tax years.²² UK residency for this purpose will be determined using the statutory residence test, which is also used for income tax and capital gains tax. This new rule lowers the threshold for being subject to UK inheritance tax on worldwide assets compared to the current 15-year deemed domicile rule, potentially impacting US citizens in the UK sooner. Once an individual attains long-term resident status, their worldwide assets will effectively fall within the scope of UK inheritance tax from their 11th year of UK tax residence.²²

Furthermore, the new rules introduce an "IHT tail." Individuals who become long-term residents and subsequently cease to be UK resident will remain subject to UK inheritance tax on their worldwide assets for a period after leaving the UK. The length of this tail depends on the duration of their UK residence, ranging from a minimum of three years for those resident for 10 to 13 of the previous 20 UK tax years, up to a maximum of ten years for those resident for 20 or more years.²²

The upcoming changes also have implications for trusts. From April 2025, the inheritance tax treatment of trusts will be linked to the settlor's long-term resident status. The current "excluded property trust" status, which often protected non-UK assets settled by non-UK domiciled individuals from IHT, will be abolished for settlors who become long-term residents.²² This means that trusts settled by US citizens who become long-term UK residents may become subject to UK inheritance tax charges, including 10-yearly anniversary charges and exit charges on trust assets. These significant changes necessitate a careful review of long-term residency plans and existing estate planning structures for US citizens residing in the UK.

5. The US-UK Estate and Gift Tax Treaty:

5.1. Overview of the Treaty's Objectives and Scope:

The Convention between the Government of the United States of America and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Estates of Deceased Persons and on Gifts was established with the primary objective of alleviating double taxation on the estates and gifts of citizens and domiciliaries of both countries.²⁴ The treaty also aims to prevent fiscal evasion in relation to these taxes.

The specific taxes covered by this treaty are, in the United States, the Federal gift tax and the Federal estate tax, including the tax on generation-skipping transfers, and in the United Kingdom, the capital transfer tax, which has since been replaced by inheritance tax.²⁴ It is important to note that the treaty does not extend to state or local death or gift taxes imposed within the United States.²⁶ The US-UK Estate and Gift Tax Treaty serves as a crucial framework for resolving potential conflicts arising from the application of the separate tax laws of each country to the same individual or assets.

5.2. Definition of "Domicile" under the Treaty and Tie-breaker Rules for Dual Domiciliaries:

The US-UK Estate and Gift Tax Treaty establishes its own definition of "domicile," referred to as fiscal domicile, which may differ from the definitions used in the domestic laws of each country.²⁶ Under the treaty, an individual is initially considered domiciled in the United States if they were a resident (domiciliary) thereof or if they were a national thereof and had been a resident (domiciliary) thereof at any time during the preceding three years.²⁴ In the United Kingdom, an individual is initially considered domiciled if they were domiciled in the UK according to UK law or if they were treated as so domiciled for the purpose of the capital transfer tax (now inheritance tax).²⁴

Recognizing that an individual might be considered domiciled in both the US and the UK under these initial definitions, the treaty provides a set of tie-breaker rules to determine a single country of domicile for the purposes of the treaty.²⁴ These rules are applied in a specific order:

• A national of the United Kingdom (but not the United States) is deemed to be domiciled in the UK if they have not been resident in the US for federal income tax purposes in seven or more of the ten taxable years ending with the year in which the relevant time falls (death or transfer).

• A national of the United States (but not the United Kingdom) is deemed to be domiciled in the US if they have not been resident in the UK in seven or more of the ten income tax years of assessment ending with the year in which the relevant time falls. For this rule, residency in the UK is determined as for income tax purposes but without regard to any dwelling-house available to them in the United Kingdom for their use.

• If these nationality and residency rules do not resolve the issue, the individual is deemed to be domiciled in the Contracting State in which they had a permanent home available to them.

• If they had a permanent home available in both Contracting States or in neither, they are deemed to be domiciled in the Contracting State with which their personal and economic relations were closest (centre of vital interests).

• If the Contracting State of their centre of vital interests cannot be determined, they are deemed to be domiciled in the Contracting State in which they had an habitual abode.

• If they had an habitual abode in both Contracting States or in neither, they are deemed to be domiciled in the Contracting State of which they were a national.

• If the individual was a national of both Contracting States or of neither, the competent authorities of the Contracting States shall settle the question by mutual agreement.

For a US citizen resident in the UK, these tie-breaker rules are particularly important as they can determine their "treaty domicile," which subsequently dictates how taxing rights are allocated between the two countries under the treaty.

5.3. Allocation of Taxing Rights between the US and UK based on the Treaty:

Article 5 of the US-UK Estate and Gift Tax Treaty outlines the allocation of taxing rights between the two countries. The general rule is that if the decedent or transferor was domiciled in one Contracting State according to the treaty's definition, their property will not be taxable in the other Contracting State.²⁴ However, there are significant exceptions to this rule. Immovable property (real property) ices, located in the other state, may still be taxed by that other state.²⁴

Furthermore, the general rule of exclusive taxing rights for the country of domicile does not apply if the decedent or transferor was a national of the State in which they were not domiciled.²⁴ This provision preserves the right of a country to tax its own nationals even if they are considered domiciled elsewhere under the treaty. The treaty also includes specific rules regarding the US tax on generation-skipping transfers and the UK tax on property in a settlement, based on the domicile and nationality of the deemed transferor or settlor.²⁴ These provisions aim to prevent either country from imposing tax in situations where the primary connection lies with the other country based on domicile and nationality.

6. Prevention of Double Taxation under the US-UK Tax Treaty:

6.1. Mechanisms within the Treaty to Avoid Double Taxation of Estates and Gifts:

The primary mechanism employed by the US-UK Estate and Gift Tax Treaty to prevent the double taxation of estates and gifts is the provision of tax credits, as detailed in Article 9 of the treaty.²⁴ This article establishes a framework where one country provides a credit against its own tax for the tax paid to the other country on the same property.

Specifically, the treaty addresses situations where property is taxed based on its location (situs). If the United Kingdom taxes property situated within its borders (such as real estate or business property), the United States, as the country of domicile or nationality, will allow a credit against its federal estate or gift tax for the amount of UK inheritance tax paid on that property.²⁴ Conversely, if the United States taxes property situated within its borders, the United Kingdom will provide a credit against its inheritance tax for the US federal estate or gift tax paid.²⁴

The treaty also addresses situations where both countries might tax the same property based on domicile or nationality. For instance, if a US citizen is considered domiciled in the UK for treaty purposes, the US will generally provide a credit for the UK inheritance tax paid against its own tax on the same property.²⁴ Similarly, if a UK national is considered domiciled in the US for treaty purposes, the UK will typically credit the US estate or gift tax paid against its own inheritance tax.²⁴ Article 9 also includes specific rules for the provision of tax credits in relation to property held in trusts or considered part of settlements under the laws of the respective countries, further aiming to prevent double taxation in these complex scenarios.²⁴

6.2. Explanation of Tax Credits and How They Apply in Practice:

The amount of the tax credit provided by one country for taxes paid to the other is generally limited to the amount of tax actually paid to the other country with respect to the specific property.²⁴ Furthermore, the credit cannot exceed the portion of the tax imposed by the country providing the credit that is attributable to the property being taxed by the other country.²⁴ This ensures that the credit is proportionate to the tax liability in each jurisdiction.

A crucial point to note is that a tax credit under the US-UK Estate and Gift Tax Treaty is not finally allowed until the tax for which the credit is claimed has been paid to the other country.²⁴ This requirement ensures that the relief is granted only when the corresponding tax obligation has been fulfilled. There is also a time limit for claiming a credit or a refund under the treaty. Generally, such claims must be made within six years from the date of death or the date of the gift, or within one year from the last date on which the tax for which the credit is claimed was due, whichever is later.²⁴ This timeframe provides a window for taxpayers to seek relief from double taxation.

Consider a simplified hypothetical example: A US citizen resident in the UK owns a piece of real estate in the US valued at $2 million. Upon their death in 2025, their estate is subject to both US federal estate tax and UK inheritance tax. Assuming the individual is considered UK domiciled under the treaty's tie-breaker rules, the US would have the primary right to tax the real estate based on its situs. The UK would also tax the worldwide estate, including the US real estate, due to the treaty domicile. To prevent double taxation, the US would provide a credit against its estate tax for the amount of UK inheritance tax paid on the $2 million US property. Similarly, the UK would provide a credit against its inheritance tax for the US estate tax paid on the same property. The specific amounts of the credits would depend on the effective tax rates in each country and the valuation of the property. This mechanism ensures that the same asset is not subjected to the full burden of estate/inheritance tax in both the US and the UK.

7. Treatment of Different Types of US Assets:

7.1. US Real Estate:

For US federal estate tax purposes, real estate located within the United States is considered a US situs asset and is subject to US federal estate tax, regardless of the owner's citizenship or residency.⁷ Therefore, US real estate owned by a US citizen resident in the UK will be included in their gross estate for US estate tax purposes.

This same US real estate will also be subject to UK inheritance tax if the US citizen is considered domiciled in the UK for IHT purposes, either under general law, the deemed domicile rules (having resided in the UK for 15 out of the last 20 tax years), or if they become a long-term resident under the new rules effective April 2025 (having been UK resident for 10 out of the last 20 tax years).¹⁵

Article 6 of the US-UK Estate and Gift Tax Treaty specifically addresses immovable property, which includes real estate. It states that such property may be taxed in the Contracting State in which it is situated.²⁴ In this scenario, the US has the primary taxing right over the real estate located within its borders. However, as the individual may also be considered UK domiciled (under UK law or the treaty), the UK may also seek to tax the value of this asset as part of their worldwide estate.

To prevent this double taxation, Article 9 of the treaty provides for tax credits.²⁴ If the US citizen is considered a US national and domiciliary under the treaty, the US will allow a credit against its estate tax for the UK inheritance tax paid on the US real estate, as the UK tax is imposed according to Article 6. Similarly, if the individual is considered UK domiciled under the treaty, the UK would provide a credit for the US estate tax paid on the same property.

While strategies such as holding US real estate through certain types of trusts or corporate structures might be considered for non-US citizens to mitigate US estate tax, these can have complex implications for US citizens and should be carefully evaluated with professional advice to ensure they do not trigger adverse US tax consequences.³⁰

7.2. US Financial Accounts:

For a US citizen resident in the UK, any financial accounts held in the US are considered part of their worldwide estate and are subject to US federal estate tax 4. The value of these accounts will be included in the taxable estate in the US.

These same US financial accounts will also be subject to UK inheritance tax if the US citizen is considered domiciled in the UK for IHT purposes (under general law, deemed domicile rules, or the upcoming long-term residency rules).¹⁵

Under the US-UK Estate and Gift Tax Treaty, the situs of intangible personal property, which generally includes financial accounts and stocks, is determined by the domicile of the decedent.²⁴ While Article 6 covers immovable property and Article 7 covers business property, for other assets like financial accounts, Article 5 generally grants taxing rights to the country of domicile, but reserves the right of the country of nationality to also tax. This means that if the US citizen is considered US domiciled under the treaty, the US has the primary right to tax these assets, but the UK might also tax them if the individual is also UK domiciled under UK law or becomes a long-term resident.

Article 9 of the treaty again provides the mechanism for alleviating double taxation through tax credits.²⁴ If both the US and the UK tax these financial accounts based on domicile or nationality, the treaty ensures that a credit is given by one country for the tax paid to the other.

It is important to note the potential for adverse tax outcomes under UK IHT for US tax-advantaged accounts, such as Individual Retirement Accounts (IRAs) and 401(k)s.³¹ Withdrawals from these accounts by beneficiaries might be subject to both US income tax and UK inheritance tax without a full offset, potentially leading to a significant combined tax burden. Careful planning is therefore essential for these types of assets.

8. Tax Planning Strategies:

8.1. Strategies for Minimizing Overall Estate and Gift Tax Liabilities in Both Countries:

Effective tax planning is paramount for a US citizen resident in the UK with US assets to minimize their overall estate and gift tax liabilities in both countries. This process should ideally begin early and involve experienced tax advisors in both the US and the UK who specialize in cross-border estate and gift tax matters.² Given the scheduled reduction in the US federal gift and estate tax exemption in 2026, individuals should consider the timing of lifetime gifts to potentially utilize the currently higher exemption amount.¹

8.2. Utilizing the US-UK Estate and Gift Tax Treaty for Planning Purposes:

The US-UK Estate and Gift Tax Treaty offers several planning opportunities. For US citizens who are not also UK nationals, establishing that their "treaty domicile" is in the US under the treaty's tie-breaker rules can significantly limit their exposure to UK inheritance tax on assets other than UK real estate and business property of a UK permanent establishment.²⁷ Therefore, carefully analyzing one's treaty domicile based on the rules outlined in Article 4 is a crucial first step in planning.

8.3. Consideration of Trusts:

Trusts can be valuable tools in US estate planning for removing assets from the taxable estate. For instance, Spousal Lifetime Access Trusts (SLATs) and Irrevocable Life Insurance Trusts (ILITs) are commonly used strategies.¹ The US-UK Estate and Gift Tax Treaty also introduces the concept of "Treaty Protected Trusts." If a US citizen is treaty domiciled in the US and is not a UK national, assets settled into such a trust may be exempt from UK inheritance tax.²⁷ However, it is crucial to be aware of the upcoming changes to the UK IHT treatment of trusts for settlors who become long-term UK residents from April 2025, which could introduce 10-yearly anniversary charges and exit charges on trust assets.²² Trusts settled before October 30, 2024, by individuals who were not UK domiciled or deemed domiciled at that time ("excluded property trusts") may have some grandfathering provisions, but this requires careful review.²³ It is generally advisable to avoid using US revocable "living trusts" if the individual is or may become UK domiciled, as transferring assets into such a trust can trigger an immediate UK inheritance tax charge.³⁴

8.4. Lifetime Gifting Strategies:

Implementing a well-considered lifetime gifting strategy can help reduce the potential taxable estate in both the US and the UK. Utilizing the annual US gift tax exclusion of $19,000 per recipient is a straightforward way to achieve this.¹ Making larger lifetime gifts to utilize the unified US gift and estate tax exemption, especially before the potential reduction in 2026, should also be considered.¹ It is important to be aware that under UK inheritance tax rules, lifetime gifts made within seven years of death might still be subject to IHT under the "potentially exempt transfer" (PET) rules if the donor does not survive for the full seven-year period.¹⁶

8.5. Other Strategies:

Depending on individual circumstances, other strategies might be relevant. For those holding UK nationality, the potential benefits and drawbacks of renouncing it in the context of the US-UK Estate and Gift Tax Treaty should be explored.²⁸ Regularly reviewing domicile status under UK law and monitoring the duration of UK residency in light of the upcoming long-term residency rules is essential.¹⁵ Maximizing contributions to UK pension schemes can be advantageous for UK inheritance tax purposes¹⁹, but the US estate tax treatment should also be considered.³¹ Ensuring the effective utilization of foreign tax credits available under both US and UK tax laws is crucial for offsetting taxes paid in one country against the liability in the other.⁴ For individuals newly resident in the UK, the potential benefits of the new four-year Foreign Income and Gains (FIG) regime should be explored as it might provide a window for strategic tax planning.³³

9. Reporting Requirements:

9.1. US Estate and Gift Tax Reporting Requirements:

For US federal estate tax, Form 706 (United States Estate (and Generation-Skipping Transfer) Tax Return) is required to be filed if the gross estate exceeds the applicable exemption amount at the time of death. This return is generally due nine months after the date of death.³⁷ For federal gift tax, Form 709 (United States Gift (and Generation-Skipping Transfer) Tax Return) must be filed to report any gifts exceeding the annual exclusion amount or certain other taxable gifts made during the calendar year. This form is typically due by April 15th of the year following the gift.¹¹ Additionally, Form 3520 (Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts) may be required to report the receipt of certain gifts or bequests from foreign persons exceeding $100,000.⁸ In certain situations, Form 8971 (Information Regarding Beneficiaries Acquiring Property From a Decedent) may also need to be filed by the executor of the estate.¹¹

9.2. UK Inheritance Tax Reporting Requirements:

For UK inheritance tax, the primary reporting form is Form IHT400 (Inheritance Tax account), which is used to report the value of the estate to HM Revenue and Customs (HMRC).³⁸ This form must be submitted within 12 months of the person's death.³⁸ HMRC provides guidance on how to complete Form IHT400.³⁸ Inheritance Tax is generally payable by the end of the sixth month after the person's death.¹⁸

9.3. Importance of Understanding Filing Deadlines and Potential Penalties:

Failure to meet reporting deadlines or pay taxes on time in both the US and the UK can result in significant consequences, including penalties and interest charges.¹⁰ Therefore, it is strongly recommended to seek professional assistance from tax advisors in both countries to ensure full compliance with all reporting requirements and payment obligations in each jurisdiction.

10. Conclusion:

The intersection of US federal estate and gift tax and UK inheritance tax presents a complex landscape for a US citizen resident in the UK who retains assets in the US. The determination of domicile under both UK law and the US-UK Estate and Gift Tax Treaty, along with the upcoming shift to a long-term residency-based system for UK IHT, are critical factors in understanding the potential tax liabilities in both countries. The US-UK Estate and Gift Tax Treaty serves as a vital tool for mitigating the risk of double taxation through the provision of tax credits and the allocation of taxing rights. However, navigating these intricate rules and regulations effectively necessitates proactive and personalized tax planning. Therefore, it is of paramount importance for individuals in this situation to seek expert advice from experienced international tax advisors in both the United States and the United Kingdom. These professionals can provide tailored strategies that take into account the individual's specific circumstances, asset holdings, and long-term financial goals, ultimately helping to minimize their overall tax burden and ensure compliance with the tax laws of both countries.