US citizens moving to the UK part 4: Inheritance tax and estate planning

Key takeaways:

• The UK’s nil-rate band for Inheritance Tax (IHT) is just £325,000, significantly lower than the US equivalent of approximately $13.6 million, making IHT planning essential for Americans with UK assets.
• Individuals who have been UK tax resident for at least ten of the previous twenty tax years become “long-term residents” and their worldwide estate falls within scope of IHT.
• Trusts are subject to separate IHT rules, with charges potentially arising on creation, ten-year anniversaries, distributions and the settlor’s death.
• Carefully designed wills, life insurance and the US/UK estate tax treaty can be used to mitigate double taxation on estates and gifts.

Understanding UK inheritance tax: The basics

The UK’s equivalent of estate tax is Inheritance Tax. Despite its name, IHT may apply to capital transfers made during lifetime as well as on death. It can also apply to certain transfers made to or by trustees and companies. The US and the UK have an estate tax treaty to avoid double taxation on estates and gifts.

For individuals, exposure to IHT depends on whether they are a “long-term resident” (LTR) and where their assets are situated. An individual is an LTR if they have been UK tax resident for at least ten of the previous twenty tax years, and the LTR status can continue for up to ten years after they leave the UK. The US/UK estate tax treaty may assist to override this IHT “tail”. The worldwide estate of an LTR is within scope of IHT. Otherwise, an individual’s estate is within scope of IHT to the extent they have assets situated in the UK.

IHT thresholds, rates and reliefs

Broadly, the first £325,000 of an individual’s estate is subject to IHT at 0% (the “nil-rate band” or NRB), which is significantly lower than the US equivalent of $15 million for 2026. The NRB is transferable between spouses. IHT is then charged at 40% on death, including on any incomplete gifts or gifts made in the seven years prior, or 20% on lifetime transfers, subject to any available reliefs and exemptions.

A further nil-rate band of £175,000 (the “residence nil-rate band” or RNRB) is available on specific transfers of an individual’s home on their death and is also transferable between spouses. Transfers between spouses are generally free of IHT, unless the transfer is from an LTR to a non-LTR, in which case only the first £325,000 of value is free of IHT, unless the non-LTR spouse elects to be treated as an LTR. In some circumstances, the US/UK estate tax treaty will also assist.

How trusts are treated for IHT purposes

Trusts are subject to separate IHT rules with possible IHT charges arising on several occasions: when assets are settled on trust (at a rate of 20% but an overall effective rate of 25%) if the settlor is an LTR or settles UK assets; on ten-year anniversaries of, and distributions from, the trust (both at a rate of up to 6%) if the settlor is an LTR at these points; on the settlor ceasing to be LTR (at a rate of up to 6%); on the settlor’s death if the settlor may be able to benefit from the trust (at a rate of 40%); and when certain types of “life interest” trusts terminate (at a rate of 40%) if the settlor or the income beneficiary are LTR at the relevant time. The US/UK estate tax treaty may assist those who are domiciled in the US and not a UK national to limit IHT exposure on their trusts to UK real estate and UK business assets.

Wills, estate planning and life insurance strategies

Typically, a cost-effective US estate tax and IHT mitigation strategy is to secure a deferral of tax until the death of a surviving spouse. This can be achieved through the preparation of wills carefully designed to be tax-efficient in both jurisdictions and to maximise relief from double taxation under the US/UK estate tax treaty, for example by including a qualified domestic trust for a non-US spouse.

Life insurance can be a simple and cost-effective option for mitigating IHT, provided that the policy is structured and the payment of premiums coordinated to exempt the life policy death benefits from US estate tax and IHT. The UK has no general wealth tax.

This is part four of our eight-part series, “US citizens moving to the UK.” Read the other posts in this series for guidance on immigration, tax residence, healthcare, banking, housing and education.