As with income tax planning, US citizens or green card holders living in the UK need to consider both US and UK tax rules when it comes to gift, estate and inheritance tax planning.

While income tax planning is often the primary focus for individuals, gift, estate and inheritance tax planning can be equally important when considering the transfer of wealth. For those with UK and US connections, it is essential to consider both UK and US tax rules together to help preserve wealth during lifetime and ensure it is passed efficiently to future beneficiaries. In light of recent legislative changes, individuals should review their estate planning carefully.

Long-term residents

From 6 April 2025, the former domicile regime was replaced by a residence‑based system. Under this new system, non‑UK assets fall within the scope of UK inheritance tax where an individual is treated as a long‑term UK resident, defined as being UK resident for at least ten of the previous twenty tax years. Once in scope, individuals may remain subject to UK inheritance tax on their non‑UK assets for a period of between three and ten years after leaving the UK. In certain circumstances, relief may be available under the UK/US tax treaty to reduce this exposure, provided all relevant conditions are met, highlighting the importance of effective tax planning.

Pensions

Currently, pensions are generally excluded from the valuation of an individual’s estate for UK inheritance tax purposes. From 6 April 2027, pensions will be included within the UK inheritance tax net. This includes foreign (non-UK) pensions for long-term residents.

US estate tax exemption versus UK inheritance tax nil rate band

Under President Trump’s 2017 tax reforms, the increased US estate tax exemption was originally due to sunset at the end of 2025. Under his subsequent ‘One Big Beautiful Bill’, the increased exemption was made permanent and increased to $15 million per individual ($30 million for married couples) for 2026. This means that the first $15 million of a US citizen’s estate is exempt from US estate tax, with any value above this threshold subject to estate tax at a rate of 40%.

In contrast, in the UK, each individual is entitled to a nil rate band, currently £325,000, meaning the first £325,000 of an estate is excluded from UK inheritance tax. This nil rate band has been frozen and is not expected to increase until at least April 2031. Generally, assets in excess of the nil‑rate band are subject to UK inheritance tax at a rate of 40%.

Spousal exemption

If both spouses are long‑term UK residents for inheritance tax purposes, assets can pass between them on death free of UK inheritance tax. However, where a long‑term resident leaves assets to a spouse who is not a long‑term resident, the spousal exemption is restricted to the nil‑rate band, currently £325,000.

Trusts

Historically, US citizens living in the UK could establish excluded property trusts before becoming deemed domiciled under the former UK inheritance tax regime, allowing assets to remain outside the scope of UK inheritance tax. This planning is no longer effective under the new regime.

Despite these changes, the US/UK Estate Tax Treaty remains in force and continues to offer valuable protection. In particular, under Article 5(4) of the treaty, the UK cannot levy inheritance tax on property held in a trust where, at the time the trust was settled, the settlor was domiciled in the US and was not a UK national. In practice, this means that:

Trusts settled by a US domiciliary before they become a UK citizen can remain outside of UK inheritance tax, even if the settlor later becomes a long-term resident.

Treaty protection applies to 10-year charges, exit charges, and gift-with-reservation rules.

For US citizens relocating or living in the UK, this creates an important planning opportunity. Trusts established while the individual is US‑domiciled and not a UK national could shelter non‑UK assets from UK inheritance tax, provided the treaty conditions are met. It is worth noting that appropriate treaty claims must be made in the UK at the time of any relevant chargeable event.

The structure, timing, and assets settled into the trust must be reviewed to ensure the intended protection is achieved, making advance planning particularly important. They would also require review from a US tax and compliance perspective.

Certain trusts established before 30 October 2024 may benefit from important transitional (“grandfathering”) provisions following the introduction of the UK’s residence‑based inheritance tax regime. These provisions are particularly relevant for certain qualifying interest in possession and other pre‑existing trust arrangements so long as the settlor is not UK long term resident.

Case Study

Michael and Susan are both US citizens and have been married for 30 years. Susan is a UK citizen, but Michael is not. Michael moved to the UK in July 2015, and Susan became UK resident four years later, in August 2019.

Michael and Susan jointly own a UK property worth $5 million, with no mortgage. Michael holds cash in a UK account of $2 million and $1 million of investments in a US situs account. They wish to pass their wealth to their two children.

Michael and Susan are keen to move back to the US in the near future. They have heard about the changes to UK inheritance tax with the introduction of the residence-based system and have approached Buzzacott for specialist advice.

What could Michael and Susan do?

As Michael has US and UK estate and inheritance tax exposure, with no planning in place he will potentially be exposed to a 40% inheritance tax bill on his worldwide estate. As Michael’s total asset value is under the US threshold ($15 million per individual for 2026), his primary concern is UK inheritance tax, as the nil rate band is only £325,000 per individual.

Susan is currently only subject to UK inheritance tax on her UK situs assets, for example the UK property, and any other UK situs assets she inherits or are in her name on her death. This is because she has not yet been in the UK for at least ten of the prior twenty tax years. She will be considered a long-term resident from 6 April 2029 and would then be subject to UK inheritance tax on her worldwide assets.

Lifetime gifting

Michael mentioned to Buzzacott that he would like to gift cash of $500,000 to each of his children and is keen to ensure these gifts are structured in the most tax efficient manner.

For US estate tax purposes, any lifetime gifts reduce the donor’s available lifetime estate tax exemption. Gifts made within the annual exclusion (currently $19,000 per recipient for 2026) can be made without utilising the lifetime exemption. Michael and Susan may also elect to split gifts for US estate tax purposes, which would allow them to gift a combined total of $38,000 per child for 2026 without reducing their estate exemptions. The amount gifted above this annual exclusion would reduce their respective lifetime estate tax exemptions.

From a UK inheritance tax perspective, lifetime gifts can be fully exempt provided the donor survives for seven years from the date of the gift. If the donor were to die within this period, the gift would remain chargeable to IHT (payable by the donee). Michael is currently in good health and anticipates living well beyond seven years, meaning that, assuming he survives this period, the gifts should not be subject to UK inheritance tax. There is the option that Michael could consider the use of life insurance to cover the seven-year period to pay for some or all of the inheritance tax bill that would be due, payable by the children, if he did not survive the seven-year period.

Michael can also make use of the annual UK gift allowance of £3,000 per recipient. Furthermore, where gifts are made regularly out of surplus income, they may qualify as fully exempt gifts for UK inheritance tax purposes without the need to survive seven years.

Transfer of assets and residency

Michael could consider transferring certain non‑UK assets to Susan, who is not currently subject to UK inheritance tax on her non‑UK assets. For example, Michael may wish to transfer his US investment account to Susan. This would keep the assets outside the scope of UK inheritance tax until 6 April 2029, at which point Susan would became a long-term resident too. If Susan were to then leave the UK and ensure that she was not UK tax resident for at least ten of the preceding twenty tax years, she would not become a long‑term resident for UK inheritance tax purposes and any non-UK assets would not be in the scope of UK inheritance tax.

Further to the above, gifts between US citizen spouses do not generally give rise to any UK or US tax liabilities. As both Michael and Susan are US citizens, they are able to transfer an unlimited amount between themselves for US and UK tax purposes. Where one spouse is a non‑resident alien, transfers between spouses can give rise to additional reporting requirements, such as Forms 3520 or 709, depending on the value of the gift and the direction of the transfer. However, these considerations are not relevant in Michael and Susan’s circumstances.

If Michael were planning to become non‑UK resident and were to die while still subject to UK inheritance tax on his non‑UK assets, he may be able to claim relief under US/UK estate tax treaty, given that he is not a UK citizen, provided all other applicable conditions are met. Buzzacott would be able to advise further on the availability of treaty relief.

Trusts

Based on the current facts, establishing a trust may not be an effective planning option. Treaty relief would not be available in this case as Susan is already a UK national (and does not want to revoke her UK citizenship) and Michael is already a long‑term UK resident, meaning that UK inheritance tax entry charges could arise if he were to settle assets into a trust.

Where appropriate, trust planning can be a valuable strategy to keep foreign assets outside UK inheritance tax. Buzzacott can provide tailored advice on the above, including treaty relief, and HMRC reporting.

How we can help

Gift, estate, and inheritance tax planning is essential to ensure your transfer of wealth is structured efficiently and in line with your long‑term objectives. We are here to provide effective tax planning to help protect your wealth for future generations and can advise on the most appropriate planning for your future, tailored to your unique personal and financial circumstances.