GIFTS, INHERITANCE TAX, AND ESTATE TAX AS AN AMERICAN IN THE UK

From a UK tax perspective, there are no Income Tax implications on the receipt of a cash gift unless the cash gift generates interest or dividends.  These would then potentially be subject to tax.

You may also wish to consider any Inheritance Tax implications.  Inheritance Tax may have to be paid after your death on some gifts you’ve given.

Gifts given less than 7 years before you die may be taxed depending on:

• Who you give the gift to and their relationship to you
• The value of the gift
• When the gift was given

What Counts as a Gift

Gifts include:

• Money
• Household and personal goods (e.g., furniture, jewellery, or antiques)
• A house, land, or buildings
• Stocks and shares listed on the London Stock Exchange
• Unlisted shares you held for less than 2 years before your death

A gift can also include any money you lose when you sell something for less than it’s worth. For example, if you sell your house to your child for less than its market value, the difference in value counts as a gift.

​​Anything you leave in your will does not count as a gift but is part of your estate. Your estate is all your money, property and possessions left when you die. The value of your estate will be used to work out if Inheritance Tax needs to be paid.

Who Does Not Pay Inheritance Tax

Some gifts are exempt from Inheritance Tax.

There’s no Inheritance Tax to pay on gifts between spouses or civil partners. You can give them as much as you like during your lifetime, as long as they:

• Live in the UK permanently
• Are legally married or in a civil partnership with you

There’s also no Inheritance Tax to pay on any gifts you give to charities or political parties.

Using Allowances to Give Tax-Free Gifts

Each tax year, you can also give away some money or possessions free of Inheritance Tax. How much is tax free depends on which allowances you use.

Annual Exemption

You can give away a total of £3,000 worth of gifts each tax year without them being added to the value of your estate. This is known as your ‘annual exemption.’

• You can give gifts or money up to £3,000 to one person or split the £3,000 between several people.
• You can carry any unused annual exemption forward to the next tax year – but only for one tax year.
• The tax year runs from 6 April to 5 April the following year.

Small Gift Allowance

You can give as many gifts of up to £250 per person as you want each tax year, as long as you have not used another allowance on the same person.

Birthday or Christmas gifts you give from your regular income are exempt from Inheritance Tax.

Gifts for Weddings or Civil Partnerships

You can give a tax free gift to someone who is getting married or starting a civil partnership. You can give up to:

• £5,000 to a child
• £2,500 to a grandchild or great-grandchild
• £1,000 to any other person

If you’re giving gifts to the same person, you can combine a wedding gift allowance with any other allowance, except for the small gift allowance.

For example, you can give your child a wedding gift of £5,000 as well as £3,000 using your annual exemption in the same tax year.

If You Make Regular Payments

You can make regular payments to another person, for example to help with their living costs. There’s no limit to how much you can give tax free, as long as:

• You can afford the payments after meeting your usual living costs
• You pay from your regular monthly income

These are known as ‘normal expenditure out of income.’ They can include:

• Paying rent for your child
• Paying into a savings account for a child under 18
• Giving financial support to an elderly relative

If you’re giving gifts to the same person, you can combine ‘normal expenditure out of income’ with any other allowance, except for the small gift allowance.

For example, you can give your child a regular payment of £60 a month (a total of £720 a year) as well as using your annual exemption of £3,000 in the same tax year.

The 7-year rule

No tax is due on any gifts you give if you live for 7 years after giving them – unless the gift is part of a trust. This is known as the 7 year rule.

If you die within 7 years of giving a gift and there’s Inheritance Tax to pay on it, the amount of tax due after your death depends on when you gave it.

Gifts given in the 3 years before your death are taxed at 40%.

Gifts given 3 to 7 years before your death are taxed on a sliding scale known as ‘taper relief’.

Taper relief only applies if the total value of gifts made in the 7 years before you die is over the £325,000 tax-free threshold.

Taper Relief

Giving Gifts You Still Benefit From

If you give something away but still benefit from it (a ‘gift with reservation’), it will count towards the value of your estate.

Gifts with reservation include:

• Giving your home to a relative but still living there
• Giving away a caravan but still using it for free for your holidays
• Giving away a valuable painting but still displaying it in your house

Read further guidance on when a gift with reservation counts towards the estate’s value.

Keeping Records of Gifts You’ve Given

The person who deals with your estate will need to work out what gifts you gave in the 7 years before your death. You should keep the following records:

• What you gave and who you gave it to
• The value of the gift
• When you gave it

How Inheritance Tax on a Gift Is Paid

Any Inheritance Tax due on gifts is usually paid by the estate, unless you give away more than £325,000 in gifts in the 7 years before your death. Once you’ve given away more than £325,000, anyone who gets a gift from you in those 7 years will have to pay Inheritance Tax on their gift.

Americans in the UK?

If you’re a UK resident inheriting assets from the US, here are the key things you need to bear in mind as a beneficiary:

1. The US does not impose a direct inheritance tax on beneficiaries.  There’s an estate tax  So, if you’re a UK resident receiving inheritance tax, you won’t need to pay anything because the government takes taxes from the estate before they reach you or any of the other beneficiaries.
2. However, if you generate income from your inherited assets, you might have to pay taxes on that income (e.g rental income or dividends).
3. From 6 April 2025, you will be liable to UK inheritance tax on your worldwide assets if you become a long-term resident (‘LTR’) in the UK (i.e. if you have been resident in the UK under the statutory residence test for 10 out of the previous 20 years).
4. If you are not LTR you will only be subject to UK inheritance tax on your UK situated assets.
5. Once you are LTR, if you decide to cease being UK resident, you will remain subject to IHT on your worldwide assets for up to 10 years after leaving the UK. The length of this IHT ‘tail’ will depend on how long you have been UK resident prior to leaving. If you have only been resident in the UK for between 10 and 13 years the IHT tail will be 3 years. The tail increases by one year for every further year you have been resident until you have been UK resident for 20 years or more, at which point the IHT tail is fixed at 10 years.
6. The concept of domicile remains within the double tax treaties and it is not entirely clear at this stage whether the current domicile rules will apply to determine UK domicile under the Estate Tax Treaty or whether this will now be based on long term residency. There was a one-line reference in the Budget that “there are no changes to the treaties or how these operate” which on the face of it suggests that the current domicile rules will continue to be applied when determining UK domicile for treaty purposes, but the position is unclear. The concept of US domicile remains relevant within the US tax system
7. The Estate Tax Treaty also provides a further opportunity for planning.  Article 5 confirms that: if you are domiciled under the treaty in the US at the time of your death; and are not a UK national, Then your property (other than UK real estate and UK situated business assets) shall not be taxable in the UK.
8. If you are deemed to be domiciled in the UK and US under the terms of the Estate Tax Treaty, there are specific tie breaker provisions which can be complex to apply, but which will then give treaty domicile status to one country or the other. If it is to the US, then this can be a very helpful provision.

U.S. States with Inheritance Tax

In the US, there are only six states that impose a tax on inheritance. Even with these inheritance taxes, the tax is levied on the estate and not on the individual, so as a UK resident receiving inheritance, you would not need to pay the inheritance tax.

Here’s how the regulations and the tax rate vary by state as of the date of publication (20/02/2025):

• Iowa: Inheritance tax in the state will be abolished in 2025. Rates currently range from 1% to 2% on inheritances valued between $12,500 and $150,000. Spouses, children, stepchildren, parents, grandparents and great-grandparents, grandchildren and great-grandchildren are exempt.
• Kentucky: The state has the joint highest top marginal inheritance tax rate of 16% on assets over $1,000, depending on the beneficiary’s relationship to the deceased. Spouses, parents, children, stepchildren, grandchildren and siblings are exempt.
• Maryland: The only state that imposes both an estate and an inheritance tax, Maryland levies a rate of 10% for the latter. Spouses, children, parents, grandparents, grandchildren, siblings and charities are exempt.
• Nebraska: Parents, children, siblings and grandparents pay 1% on assets over $100,000. Aunts, uncles, nieces and nephews pay 11% on assets over $40,000. All other beneficiaries pay 15% on assets over $25,000. An exemption applies to spouses and beneficiaries under age 22.
• New Jersey: The state has the joint highest top marginal inheritance tax rate of 16%, which ranges from 11% depending on the value of the assets and the relationship with the deceased. Spouses, children, parents, grandparents, grandchildren and charitable organisations are exempt. An exemption applies to siblings and sons/daughters-in-law up to $25,000.
• Pennsylvania: Inheritance tax is charged at a rate of 4.5% for close beneficiaries (children, parents and grandparents) on assets over $3,500, 12% for siblings and 15% for other beneficiaries. An exemption applies for spouses, children under 21 and charities.

Estate Tax in the U.S.

Estate tax is also deducted from the assets you’re inheriting before you inherit them. This is paid out of the estate before any remaining money, property or other assets are distributed to you and the other beneficiaries. For your information, this is how the estate is taxed before it reaches you:

The executor of the deceased’s estate must file an estate tax return. The value of the deceased’s assets is typically determined by their fair market value, not how much someone paid for them.

In addition to the federal tax, 12 states and the District of Columbia have their own estate taxes.

These are the tax rates as of the date of publishing (20/02/2025):

Trusts – Inheritance Tax

Americans and British expats in the US will often have trust structures in place as part of their planning. There are extensive changes to the taxation of trusts for inheritance tax purposes.

From 6 April 2025, where the settlor/grantor is a LTR, the trust will be within the relevant property regime and, if they are also a beneficiary, will be subject to inheritance tax on their death under the Gift with Reservation of Benefit (GROB) rules.

When a settlor who is an LTR ceases to be UK resident and the IHT tail comes to an end, there will be an exit charge of up to 6% on the value of the trust assets depending on when in the 10 year cycle the settlor ceases to be an LTR.

Trusts set up as of 30 October 2024 will not fall within the GROB rules, but will remain within the relevant property regime.

For those who are not UK resident, or who are resident in the UK for less than 10 years, who are creating a new trust, these trusts should remain outside the UK inheritance tax net. For practical purposes, if you are not UK resident, or intend to only be UK resident for less than 10 years, these rules should not impact your trusts.

Equally if you have created a US trust which benefits UK resident beneficiaries, these rules should not impact your trust.

For those who are or become LTRs these rules will have an impact. If you already had a trust in place as at 30 October 2024, then the GROB rules will not apply, but the relevant property regime (10 year anniversary charges and exit charges) will apply.  However, a 6% charge every 10 years is considerably better than 40% on death, particularly as anniversary charges can be planned for, and so it may well be sensible keeping the trust in place. As these charges are unique to the UK,  there is no relief under the Estate Tax Treaty.

However, the Estate Tax Treaty could also provide opportunities not open to non-US citizens to shelter assets in trust other than UK real estate or business interests.

Article 5 of the Estate Tax Treaty provides that:

“Tax shall not be imposed in the United Kingdom on [property held in a trust settlement] if at the time when the settlement was made the settlor was domiciled in the United States and was not a national of the United Kingdom.”

It is not quite clear whether “tax” in this context would cover not only the relevant property regime charges but also any charges as a result of a GROB, but if given its plain meaning it would seem reasonable to argue that it should do so.

It is unlikely to be helpful for dual nationals, or Americans who have been UK resident for quite some time, as the provisions to qualify as US domiciled under the treaty are narrow and the tie breaker provisions where you are nominally domiciled in both countries complex.

It is not clear how HMRC will view the treaty or whether UK domicile for treaty purposes will use the current domicile rules or the new long term residence rules and so care needs to be taken here.

In view of the above, if you have existing trusts in place it would be sensible to take UK advice before revoking or amending and restating them.

Trusts – Protected Status

Under current rules, any income or gains arising within a non-UK trust are not subject to UK income tax or capital gains tax while they remain within the trust even if the settlor is UK resident and a beneficiary of the trust (making the trust ‘settlor interested’).

Since 6 April 2025, income and gains arising within a settlor interested trust where the settlor is UK resident and not within the FIG regime, are subject to UK income and capital gains tax in the hands of the settlor whether or not they receive a benefit.

This should not be a problem for US citizens. Most US trusts are designed to be grantor trusts where the settlor is taxed on the income and gains within the trust in the US. Since 2017 many US citizens have ensured that any trust is “tainted” so that the protected settlement rules do not apply, so that the tax treatment is aligned in both UK and US thereby allowing them to claim the foreign tax credits.

Temporary Repatriation Facility and Asset Rebasing

If you are already UK resident and have claimed the remittance basis then you will qualify for the new Temporary Repatriation Facility (‘TRF’). This allows foreign income and gains which were protected by the remittance basis to be brought into the UK at a flat 12% tax rate. This will apply between 6 April 2025 and 5 April 2027. Between 6 April 2027 and 6 April 2028, the rate of tax applied will be 15%.

This is a good opportunity to bring income and gains to the UK if you are intending to remain there in the long term. However, you should seek advice as this could have an impact when calculating your foreign tax credits under the treaty and so anyone looking at this should take advice.

If you are UK resident and:

• Have claimed the remittance basis at some stage between 6 April 2017 and 5 April 2025; and
• Were not domiciled or deemed domiciled in the UK before 6 April 2025,

then you will be able to “rebase” your personally held foreign capital assets to their market value as of 5 April 2017.

Note, this does not apply to assets held in trust or held via a company; assets in a grantor trust or an LLC will not be eligible even if they are tax transparent in the US.

This will be useful for anyone who previously claimed the remittance basis but who is not eligible to claim relief under the new FIG regime as set out above.