US inheritance living in the UK

Does anyone have any experience in receiving inheritance from the US while living in the UK as a dual citizen? From what I understand, I would not pay US taxes on inheritance received in the US. However, there is a large taxation on inheritance in the UK.

Obviously, I would love to avoid paying a 40% tax.  If I live in the UK on ILR instead of becoming a citizen, would that affect if I have to pay UK tax or not?

This column in the Financial Times (2 years ago) is very similar to your situation.

https://www.ft.com/content/8e186f44-dd05-11e4-a772-00144feab7de?mhq5j=e6

This column in the Financial Times (2 years ago) is very similar to your situation.

https://www.ft.com/content/8e186f44-dd05-11e4-a772-00144feab7de?mhq5j=e6

Unfortunately the article is behind a firewall.

I would have thought inheritance tax is paid by the estate of the person who died. If the person who died did not live in the UK then I would have thought that the country of residence would tax the estate.

In the UK & US tax on death is paid by the Estate; not the recipient. Some other countries (eg Ireland) tax the recipient.

Unfortunately the article is behind a firewall.

Oh, sorry!  I found it by Googling, so I didn't hit the firewall.  I will do that thing ( ) and paste the text here.

April 10, 2015  by Lucy Warwick-Ching

I am a dual UK and Australian citizen who recently inherited money from my father in Australia. I want to bring the money over to purchase a flat for my son in London.

What are the tax implications on both the inheritance and on the transfer of money into the UK, and on the money that will be donated to my son? I am already the part-owner of a house in London.


Christopher Groves, partner at law firm Withers, says the good news is that there should be no tax implications either in the UK or Australia.

Unlike the UK, Australia does not impose an estate tax or death duties, so if your inheritance was in Australian dollars you should not have suffered any tax charges in Australia as a result of your father’s death.

The UK does not impose any inheritance taxes on the receipt of a legacy as it assumes that tax has already been paid by the estate of the deceased. But as a UK resident, you will have been subject to UK income tax on any interest earned on the legacy since you received it, since the UK taxes income on a worldwide basis.

The only exception to that would be if you are not domiciled in the UK because of your Australian heritage. In that case you may be electing to pay tax on a “non-dom”, or remittance basis. If that is the case, you will be subject to tax only on overseas income or gains remitted to the UK.

Assuming you inherited Australian dollars rather than sterling, you or your son may want to convert them to sterling at some point. Again, there is good news here as, since April 6 2012, capital gains arising on the conversion of foreign currency — for example, if the currency in question has appreciated against sterling since it was acquired — are not subject to capital gains tax.

There's more, but the remainder of the article is about using the money to purchase a flat for his son.

For completeness; there are two situations where tax might be a problem. The decedent (deceased in British English) might conceivably be a "covered expatriate". This might impose US tax on the recipient.

Much more common is that the decedent might have left investments in a US domestic trust. If a capital payment is made from a US trust to a UK resident, the UK resident might owe UK tax on stockpiled gains (and other income) within the trust.

Oh, sorry!  I found it by Googling, so I didn't hit the firewall.  I will do that thing ( ) and paste the text here.

There's more, but the remainder of the article is about using the money to purchase a flat for his son.

Thanks for the extract, very interesting.

Much more common is that the decedent might have left investments in a US domestic trust. If a capital payment is made from a US trust to a UK resident, the UK resident might owe UK tax on stockpiled gains (and other income) within the trust.

Does this second situation apply even when the settlor of the trust has no connection to the UK? The following page from the HMRC manual seems to say that a UK resident who inherits from her US domiciled parent's US domestic trust would not incur tax unless her parent had been UK domiciled or resident for sufficient years in the past.

https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm10685 [nofollow]

The extract from HMRC manuals is considering whether there might be any charge to inheritance tax on distributions to UK beneficiaries. However, it is solely concerned with that tax.

As Guya has said, there are other taxes to be considered where a UK resident receives payments from a non UK trust. The UK has a comprehensive set of rules in this area, as part of overall anti-avoidance rules. However, the motives for the setting up of the trust is mostly irrelevant and they are not disapplied because the trust in resident in the US, as contrasted to a tax haven.

In particular,the UK would tax a UK resident beneficiary on trust gains (past, present and sometimes future). There is a form of interest added where the matched from previous years, which increases the tax payable. Further, there is no relief for the US tax that the trustees might have previously paid.

Still, the UK rules give a tax burden that is generally much more favourable than the US does to US citizens receiving payments from UK resident trusts. The US tax payable in this converse situation can be eye wateringly high.