US persons are subject to US estate and gift taxes on their worldwide assets but, currently benefit from a substantial lifetime exclusion amount of $12.92 million per person.
This exclusion amount will "sunset" on 31 December 2025 and will be reduced to approximately $6-7 million ($5 million indexed for inflation).
This is an important planning deadline for many US taxpayers, and in this article we focus on planning opportunities for US persons who are UK resident non-UK domiciliaries.
The UK and US positions
The UK's "nil rate band" for inheritance tax (IHT) is (still) £325,000 per person. As both US estate and gift taxes and UK IHT are charged at up to 40 percent, planning to mitigate only US estate tax exposure before the sunset may be of no benefit to mixed UK/US taxpayers.
The 2026 reduction will be particularly significant for US persons with assets over the current US exclusion amount, who are not currently subject to UK IHT on their worldwide assets but are likely to become so in the future. If the current US exclusion is left unused at 31 December 2025, then (subject to other exemptions and reliefs) the value of their estate above the reduced US exclusion will be exposed to US estate tax and potentially within the scope of UK IHT when they become deemed domiciled in the UK.
With this in mind, there are two key planning opportunities that mixed US/UK taxpayers can take before 1 January 2026 (and before becoming deemed domiciled in the UK):
- Transferring non-UK assets into trust, up to the current US exclusion; and/or
- Making outright gifts to individuals.
Transfers into trust
Once a person is domiciled or deemed domiciled in the UK (e.g. after 15 years of residence), any transfers into a trust above £325,000 are immediately chargeable to IHT at 20 percent. In contrast, for non-UK domiciliaries, transfers of non-UK situs assets into trust are not within the scope of UK IHT; and, subject to certain conditions, the assets placed in trust can remain outside the scope of UK IHT indefinitely – even after the settlor acquires a deemed domiciled in the UK.
Therefore, for US persons that are UK resident but not yet deemed domiciled, a transfer of non-UK situs assets into a trust before 1 January 2026 would in principle not be subject to either US estate tax or UK IHT, up to $12.92 million in value.
From 1 January 2026, only c. $6-7 million of value could be transferred IHT and estate tax-free in the same way. Added to this is the suggestion by the UK Labour party that it would abolish the tax regime that currently applies to non-UK domiciliaries if it were to win the next general election, which will be held no later than 28 January 2025 (in the authors' view, it is more likely to be held in the autumn of 2024). For US persons who are currently UK resident non-UK domiciliaries, this may therefore be a moment to "use it or lose it".
Outright gifts to individuals
A similar result can be achieved with gifts to individuals. As with a transfer to a trust, a gift of non-UK situs assets by a non-UK domiciliary to another individual would be a non-event for UK IHT purposes (and could also fall within the current US estate/gift tax exclusion).
Additionally, even for UK domiciled or deemed domiciled individuals (that are also US persons), it is still possible to make gifts to individuals to utilise any unused portion of the current US estate and gift tax exclusion amount. For UK purposes, such a gift would not give rise to an immediate IHT charge and would be completely IHT-free if the donor survived the gift by seven years.
The options above present significant planning opportunities for mixed UK/US taxpayers, although please note that this article has focused on UK IHT and US estate and gift tax matters only. Transferring or gifting assets will likely have other tax implications, particularly in respect of any capital gains realised on disposal.