Two death taxes, one estate: UK inheritance tax meets the US system

Figures relate to tax year 2025-26 (UK) · 2025 (US)

UK inheritance tax and the American estate tax can both hit one estate. Britain charges on the value passing at death, based largely on domicile. America charges its citizens on worldwide assets, wherever they live. So a transatlantic family can face two systems at once.

Most families never test this until it is too late to plan. The thresholds differ enormously. The spouse exemption behaves strangely across nationalities.

And the reliefs rarely align. So this guide covers both regimes and the planning that still works.

Key takeaways

• Britain taxes on domicile and location of assets; America taxes its citizens worldwide.
• The UK nil-rate band is £325,000, with a residence band on top for a home passing to descendants.
• The American exemption runs into the millions, so most families owe nothing there.
• Leaving assets to a non-American spouse loses the unlimited US marital deduction.
• Non-Americans holding US shares face a $60,000 threshold, which surprises almost everyone.

How does UK inheritance tax work?

It charges 40% on the value of an estate above the nil-rate band, currently £325,000. A residence nil-rate band can add more where a home passes to children or grandchildren. Anything left to a spouse or civil partner is normally exempt.

According to GOV.UK's inheritance tax guidance (opens in a new tab), the charge applies to a deceased person's estate and to certain lifetime gifts. Gifts made more than seven years before death usually fall out of account. That is why the seven-year clock dominates British planning.

How does the American system differ?

It taxes the estate of a US citizen on worldwide assets. But it only bites above a very large exemption, running into millions of dollars. Most families never approach it. So the American charge is often theoretical while the British one is real.

Per the IRS estate tax guidance (opens in a new tab), an estate files once it exceeds the threshold. The exemption is scheduled to change over time. So families near the line should watch the rules closely.

Britain asks where you belonged. America asks what passport you held. A family can answer both at once.

Why does the spouse exemption cause problems?

Because America restricts it by nationality. Assets passing to a US citizen spouse enjoy an unlimited marital deduction. Assets passing to a non-American spouse do not. Decades of marriage make no difference at all.

The workaround is a qualified domestic trust, which defers the charge rather than removing it. It needs setting up properly, with a US trustee and its own rules. In our practice we see this discovered after a death far more often than before one.

The $60,000 trap for non-Americans

A British person who is not a US citizen still faces American estate tax on US-situated assets. Their exemption is not millions. It is just $60,000. Shares in American companies count as US assets, even when held through a British broker.

So a UK investor holding a large American index fund can leave a taxable US estate. They need never have set foot there. The IRS guidance for nonresident estates (opens in a new tab) sets out the position, and treaty relief may help where it applies.

What is domicile, and why does it linger?

Domicile is where you belong in the long run, rather than where you live this year. Britain uses it to decide whether inheritance tax reaches your worldwide estate or only your UK assets. It is stickier than residence by design.

An American who moves to Britain can acquire deemed domicile after enough years here. That brings worldwide assets into the British charge. Equally, a Briton who emigrates may keep UK domicile for years. Domicile follows people far longer than they expect.

How do you plan across both systems?

Start with the facts before reaching for structures. Most cross-border estate problems come from a mismatch nobody mapped, rather than from a clever arrangement that failed. Work through this sequence with a specialist:

1. Establish each spouse's citizenship, residence and domicile position honestly.
2. List assets by location, separating UK-situated, US-situated and everything else.
3. Test each estate against both thresholds, including the residence nil-rate band.
4. Check whether the marital deduction applies, or whether a qualifying trust is needed.
5. Review wills in both countries, because one can accidentally revoke the other.
6. Consider lifetime gifting against the seven-year clock, where it fits the family.
7. Revisit after every move, marriage, birth or major purchase.

What counts as a US-situated asset?

Location is decided by rules, not by where your broker sits. Shares in American companies count, wherever you hold them. So does US real estate. Cash in a US bank account can count too.

Some assets sit outside. Deposits with a foreign branch generally escape, and certain debt instruments do as well. The distinctions are technical. Yet they decide whether the small $60,000 exemption applies at all.

For a British investor, the practical answer is often structural. Holding American exposure through a UK-domiciled fund can change the position entirely. That is a conversation to have before buying, not after dying.

A worked example

Take an illustrative example. An American man and his British wife live in London. Their home is worth £900,000, and his American investments add another £400,000. He assumes his estate passes to her tax free, as it would for any British couple.

Britain agrees, provided the domicile positions align. America does not. His wife is not a US citizen, so the unlimited marital deduction fails there.

His estate sits below the large US exemption, so nothing is due today. The structure is fragile if the rules tighten.

Do the two systems give credit for each other?

Partly, and the mechanism is a dedicated estate tax treaty between the two countries. It allocates taxing rights and provides relief where both systems charge the same assets. The relief genuinely works, but it is technical, so claiming it needs proper analysis rather than assumption.

The relief also does nothing about mismatched thresholds. An estate below the American exemption but above the British band pays in Britain alone, with no American tax to credit against. Coordination helps only where both systems actually charge.

What about the family home?

It is usually the largest asset and the most reliably taxed. Britain offers a residence nil-rate band where a home passes to direct descendants. For a married couple, that can lift the effective threshold meaningfully.

According to GOV.UK's guidance on passing on a home (opens in a new tab), the relief tapers for larger estates. That taper catches exactly the families who assumed the home was covered, so it deserves checking rather than assuming.

The mistakes and penalties that follow poor planning

Estate errors are unusual because the person who made them is never there to fix them. These are the ones we see most often when families come to us after a death:

• Assuming the spouse exemption works identically in both countries.
• Holding American shares as a non-American without checking the $60,000 threshold.
• Writing a US will that unintentionally revokes an existing UK will.
• Ignoring deemed domicile after years of living in Britain.
• Making large lifetime gifts without tracking the seven-year clock.
• Leaving a trust in place that works in one country and fails in the other.

Reporting sits alongside all of this. Receiving a large inheritance from a non-American relative triggers its own American form, as our guide to the international forms you may owe explains. No tax follows, but the penalty for silence is real.

Does renouncing citizenship help?

Sometimes, though rarely as a pure estate play. Renouncing ends worldwide American exposure going forward. But the exit itself can trigger its own charges. Later gifts to American family can attract a special tax too.

Our guide to renouncing US citizenship sets out that analysis. For most families the answer lies in structuring rather than in nationality, because the reliefs available while living are more flexible than the ones available at death.

What should you do first?

Write down three facts before anything else. Where is each of you domiciled, and where do your assets actually sit? And who inherits what under the wills as they stand today? Those three answers drive every other decision you will make.

Without them, any structure is guesswork. With them, most families find the picture simpler than they feared. So start with the facts, not with the solutions.

Then get the wills reviewed together, in both countries. A will drafted in isolation is the single most common source of cross-border estate trouble we see.

How US UK Tax Accountants helps

We map both estates together through our trusts and estates service, covering domicile, asset location, the marital deduction and the treaty position. The output is a written picture of what each system would charge today.

From there the planning follows, coordinated with your solicitors on wills and trusts. One senior specialist owns the analysis, on a fixed fee agreed in writing before any work begins. You get a written picture you can act on, not a conversation you half remember.

Who pays, and when?

In Britain the estate pays, usually through the executors, and some of it falls due before probate is granted. That timing catches families holding illiquid assets, because a house cannot be sold to fund a bill that must be paid first.

America works differently again. The estate files and pays, generally within nine months of death, with extensions available. Where both systems charge, the sequencing matters as much as the amounts, and executors need advice early rather than late.

Map your position while you can

Inheritance tax planning only works while everyone is alive to do it. After a death, the options shrink to administration. Tell us where each of you is domiciled and what you hold. We will model both systems, flag the traps, and quote a fixed fee in writing. Book a consultation and hear back within one working day.

Last reviewed 9 September 2026 by the US UK Tax Accountants Tax Team. This article is general information, not personal tax advice — speak to a qualified US/UK tax adviser about your own position.

For the neighbouring question, Married to a British spouse: the marital deduction trap in US estate tax walks through it in detail.