Inheritance tax when one of you is American

It is a tax on the estate of someone who has died: their property, money and possessions. The GOV.UK guidance sets out the basics, and it applies whether or not the family thinks of itself as wealthy.

The standard rate is 40%, charged only on the part of the estate above the threshold. HMRC states the threshold as £325,000, so an estate below that figure normally pays nothing at all.

Reliefs can lift the effective threshold considerably. A main home passing to direct descendants is the common example. Meanwhile an estate below the threshold may still need reporting, so silence is not the same as exemption.

Valuing the estate is its own exercise, and the official guidance on valuing an estate walks through it. Executors carry that duty, so the records a family keeps make their job much easier.

Generously, in the ordinary case. HMRC states that there is normally no charge if you leave everything above the threshold to your spouse, your civil partner, a charity or a community amateur sports club. Most British couples rely on exactly that.

Unused threshold also transfers. Where an estate is worth less than the threshold, the unused part can be added to a surviving partner's threshold when they die. So a couple can effectively pass on more than one allowance between them.

The limits matter for cross-border families, though. The exemption operates differently where the spouses' domicile positions differ, so a couple with one British and one American partner should confirm the position rather than assume the ordinary rule applies.

A separate relief can apply where a main home passes to direct descendants, and the guidance on passing on a home explains its conditions. It is worth checking, because it can lift the effective threshold substantially.

Through citizenship and domicile rather than location. An American living in Britain stays inside the US estate tax system on their worldwide estate. Their British position does not change that. The IRS estate tax pages set out the federal framework.

The exemption figures and rates differ from the British ones entirely, and they change with legislation. So the two systems can reach different conclusions about the same estate, and neither defers to the other automatically.

Assets situated in the United States can draw American attention even where nobody is American. A British couple holding US shares or property should check that position. Situs rules look at where an asset sits, not at who owns it.

Pensions and life policies deserve separate thought here. They often pass outside a will, under nominations made years earlier, yet they still count toward an estate's value. Reviewing those nominations is one of the cheapest planning steps available.

Because the American system treats a transfer to a non-citizen spouse differently. The unlimited marital relief an American couple expects does not apply the same way. Specific structures exist to manage that gap, and they need setting up in advance.

The mirror problem appears on the British side, where the domicile of each spouse shapes how the exemption applies. So a couple can face restricted relief in both directions at once, for opposite reasons.

In our practice we see wills drafted competently in one country that quietly create a problem in the other. The document is fine. The cross-border consequence was simply never in the room.

It is a concept about your permanent home and long-term intentions, and it differs from tax residence. Someone can be UK resident for years without acquiring a British domicile, and someone can retain one long after leaving.

Domicile drives the scope of UK inheritance tax. Broadly, that means worldwide assets for those domiciled here, and UK assets for those who are not. Because it turns on facts and intention rather than day counts, it needs evidencing rather than asserting.

Our guide to the statutory residence test covers residence, which is a separate question with separate rules. Confusing the two is the most common error we correct in this area.

Deemed domicile rules can also apply after a long period of UK residence, bringing worldwide assets into scope without any change of intention. So a long stay here changes the position even for someone who always meant to leave eventually.

The order below prevents the classic outcome of two competent wills that conflict.

Do it while everyone is well. Every option below narrows once an estate is in administration.

Take an illustrative example: an American woman married to a British man, living in London with a house, two pensions and a portfolio. Her estate sits inside the US system because she is American. The house sits inside the British one because it is here.

Left to him, the British side would ordinarily attract the spouse exemption. The American side treats a transfer to a non-citizen spouse differently, so the relief she expected may not arrive in the form she assumed.

Reverse the nationalities and the problem does not simply mirror. Different assets, different domicile positions and different reliefs produce a genuinely different answer. That is why templates travel badly across this border.

Add children to the picture and it changes once more. Direct descendants open reliefs on the British side, while the American analysis follows citizenship rather than relationship. One family, two logics, and a plan that has to satisfy both at the same time.

They interact with both systems. Britain looks back at gifts made before death under its own rules, while America runs a separate gift tax regime alongside its estate tax. A transfer can therefore matter twice.

Gifts received from abroad have their own reporting on the American side, quite apart from any tax. The IRS guidance on gifts from foreign persons sets out the thresholds and the penalties for missing them.

So generosity during life needs the same cross-border check as a will. Helping a child with a deposit is a planning decision in two systems, not a private family matter in one.

There is a separate estate and gift tax treaty between the two countries, distinct from the income tax treaty that governs your annual returns. It exists precisely because these charges sit outside the income tax rules.

Like any treaty, it allocates and relieves rather than removing the need to plan. Claims have to be made, positions have to be documented, and the underlying wills still have to work in both places.

Our guide to avoiding double taxation covers the income tax machinery, which runs on entirely separate rules from anything described here.

Treat it as one instrument among several rather than a solution in itself. Wills, nominations, domicile and the treaty all have to point the same way. Any one of them pulling against the others is where cross-border estates come unstuck, usually at the worst possible moment.

More work than a single-country estate. Two sets of rules apply, two sets of forms may be needed, and the valuations have to satisfy both. Timelines stretch accordingly, so families should expect months rather than weeks.

Currency adds its own layer. Assets get valued in sterling for the British process and in dollars for the American one, at rates tied to specific dates. Those two figures will differ, and both need supporting.

Good records shorten all of it. A clear list of assets, nominations and prior gifts saves executors from reconstructing a lifetime of decisions. That list is the kindest thing a cross-border family can leave behind.

Awkwardly, because each country treats them differently on death. UK pensions often pass under scheme rules and nominations rather than through the will, which changes who receives them and when.

The American view depends on the arrangement and on who inherits. A surviving spouse, a child, and a trust can each produce a different answer. So the nomination form matters as much as the will itself.

Review those nominations whenever circumstances change. They are frequently completed once, at the start of a job, and then forgotten for decades. An outdated nomination can direct a pension somewhere the rest of your planning never intended.

Life policies raise the same point. Written in trust or not, the destination and the tax treatment can diverge across the two systems, so check both rather than assuming the British answer travels.

We work the cross-border position alongside your advisers through our treaty relief service and our trusts and estates work, so the two systems get planned together. That usually means confirming domicile first, then testing each relief against the actual facts.

If you are drafting a will, buying property, or have recently married across nationalities, send us the outline and we will map the exposure at a fixed fee agreed first. This article is general information, not personal tax advice; take advice on your own facts from a qualified adviser before acting.