For Americans living in the UK, a 529 plan that works well from a US tax perspective may not produce the same result in the UK.

Changes to the UK’s inheritance tax regime from 6 April 2025 have made that distinction more important, particularly for those who are, or are approaching, Long-Term UK Resident (LTR) status.

Historically, offshore trust protections, excluded property trust (EPT) treatment and the remittance basis often reduced UK tax concerns when assessing 529 plans. For individuals who become LTRs under the new rules, many of those mitigations may no longer apply.

That means a 529 plan set up years ago may now need to be looked at again. Depending on your circumstances, UK inheritance tax, income tax, capital gains tax, offshore fund rules and trust reporting obligations could all come into play.

In this insight, we explain how the UK’s post-April 2025 regime interacts with the US tax treatment of 529 plans, including whether a 529 plan could constitute a settlement for UK inheritance tax purposes and what that could mean in practice.

Who should read this?

This article is particularly relevant if you are:

• An American family living in the UK who already have a 529 plan.

• An American family considering establishing a 529 plan while UK resident.

• An American grandparent making contributions for UK-resident children or grandchildren.

• An American family planning to fund education in either the UK or the US.

How does the UK tax treatment differ?

For many American families, a 529 plan is the natural vehicle for funding future education costs.

From a US perspective, the benefits remain compelling. Investment growth is generally exempt from US federal income tax, and withdrawals used for qualified education expenses are typically tax-free. Many families also use 529 plans as an estate planning tool. They allow wealth to be transferred to younger generations for US gift tax and estate tax purposes while enabling the account owner to retain significant control over investments, beneficiary designations and the timing of distributions.

A further attraction is the ability to accelerate gifts for US gift tax purposes. Subject to the relevant limits, contributions can be treated as though they were made evenly over a five-year period, allowing significant amounts to be transferred into a 529 plan without immediately using the lifetime gift tax exemption.

For Americans living in the UK, however, that is only one side of the picture. The UK tax treatment can be very different.

The introduction of the new regime means that many LTRs should reconsider whether their existing arrangements continue to achieve the tax results originally intended. These structures may now create greater exposure to UK income tax and inheritance tax, making them less viable.

Could a 529 plan be treated as a trust?

Although many account holders view a 529 plan simply as an education savings account, HMRC has previously indicated informally that these arrangements may constitute a settlement for UK inheritance tax purposes. By law, 529 plans must be established under a qualifying trust arrangement in the US and maintained for the benefit of a designated beneficiary’s eligible education expenses.

If that analysis applies, the UK’s trust taxation rules also need to be considered.

Historically, many Americans benefited from favourable treatment for offshore trusts established before they became long-term residents or under the previous deemed domicile regime. EPT rules and protective settlement rules, together with the remittance basis, often limited concerns over inheritance tax, income tax and capital gains tax.

Those protections have now changed significantly.

The impact of the new LTR rules

From 6 April 2025, domicile ceased to be the primary connecting factor for UK inheritance tax. Instead, the UK introduced a residence-based regime.

Individuals who have been UK resident for at least 10 of the previous 20 tax years may now face a materially different outcome.

Unlike the previous regime, there is no equivalent concept of a protected settlement for income tax and capital gains tax purposes. In addition, the remittance basis has been replaced by the Foreign Income and Gains (FIG) regime, which is generally only available during an individual’s first four years of UK residence.

In practice, this means that:

• Trust income may become taxable on the settlor.

• Gains realised within the structure could be taxed before funds are withdrawn.

• Inheritance tax protection previously associated with excluded property trusts may no longer be available.

• Future contributions may have very different tax consequences.

The position will depend on factors including when the plan was established, subsequent contributions, the residence status of the settlor and beneficiary, and the value of the plan.

Many 529 plans established by Americans before or shortly after moving to the UK were never intended to be long-term UK tax planning structures.

The post-April 2025 rules mean that arrangements that created relatively few UK tax concerns during a settlor’s early years of UK residence may now require reassessment as LTR status approaches.

Don’t overlook the offshore fund rules

Even before the April 2025 reforms, UK-resident holders of 529 plans faced potential exposure under the UK’s offshore fund rules. The UK’s trust protections never prevented offshore income gains from arising, and many 529 plans invest predominantly in US mutual funds that do not have UK reporting status.

Where this is the case, gains realised within the plan may be taxed as offshore income gains, potentially attracting income tax rates rather than capital gains tax rates.

With the FIG regime generally limited to an individual’s first four years of UK residence, that period presents an important opportunity to review existing holdings, consider rebasing opportunities where appropriate and determine whether the existing investment structure remains suitable for families intending to remain in the UK over the longer term.

Does it matter who establishes the 529 plan?

The identity of the account owner can have a significant impact on the UK tax analysis.

Where a 529 plan is established and funded by US-resident grandparents for the benefit of UK-resident grandchildren, the UK income tax position may be more favourable than where the plan is established by UK-resident parents. In particular, the UK settlor-interested trust rules that can attribute trust income and gains back to the UK-resident settlor may not apply where the settlor remains outside the UK.

This does not mean the arrangement is free from UK tax considerations. The treatment of distributions will still require careful analysis, but arrangements funded by US grandparents may produce materially different outcomes from those funded by UK-resident parents.

Can the UK-US Estate and Gift Tax Treaty help?

The interaction between the UK-US Estate and Gift Tax Treaty and the UK’s residence-based system for IHT deserves careful consideration.

Americans who are now LTRs may be concerned that both countries could seek to tax the same assets.

While treaty relief may mitigate double taxation in certain circumstances, its application to 529 plans is far from straightforward and depends on the particular facts.

Families with substantial balances should consider whether treaty protection is available and whether restructuring opportunities exist before education costs begin to be funded. Income tax consequences should also be reviewed alongside any inheritance tax exposure.

Time for a 529 plan health check?

The UK tax analysis in 2026 is different from the position many advisers would have reached only a few years ago. A structure that was once highly efficient for US-resident families may now raise questions over:

• Inheritance tax exposure.

• Settlor taxation of trust income and gains.

• Offshore fund rules.

• Beneficiary taxation on distributions.

• Eligibility for treaty relief.

For many Americans living in the UK, a review of existing 529 arrangements is now an important part of broader cross-border tax planning.

What should you do next?

For many American families, a 529 plan remains an attractive way to save for future education costs. The US tax benefits are well established and, in the right circumstances, a 529 plan can still be highly effective.

The important point for Americans living in the UK is not to assume that the US tax treatment carries across. The UK’s move to a residence-based regime from 6 April 2025, together with the potential application of UK trust, offshore fund and inheritance tax rules, means that a plan established years ago may now produce a different outcome.

There is no single answer for every 529 plan. The position will depend on who established and funded it, the residence status of the settlor and beneficiary, the underlying investments, the value of the plan, and whether further contributions or withdrawals are planned.

If you have an existing 529 plan or are considering establishing one while living in the UK, reviewing the position before making further contributions or withdrawals can help identify potential tax exposures and planning opportunities. Our dual-qualified US and UK private client tax specialists can help you understand the UK treatment of your 529 plan, including trust reporting obligations, inheritance tax exposure, potential treaty relief and the implications of future withdrawals.