An American in the UK
A US citizen who has spent a good deal of time in the UK may now find that his or her entire worldwide estate is potentially within the charge to UK inheritance tax, and that an estate tax treaty signed in 1978 is the thing most likely to rescue most of it. The interaction between the two is one of the quieter consequences of the April 2025 reforms, and one that advisers with American clients should not miss.
What changed in April 2025
From 6 April 2025 the charge to UK inheritance tax on non-UK assets no longer depends on domicile but on long-term residence. The test is whether the individual has been UK resident for at least ten of the previous twenty tax years, the so-called ten out of twenty test. But if that test is satisfied, the worldwide estate is potentially subject to UK IHT.
The treaty
The 1978 estate and gift tax treaty between the United Kingdom and the United States remains in force, untouched by the 2025 reforms. It was written in the language of domicile rather than long-term residence, so one might wonder whether it still applies in the same way. HMRC’s published position is that it does: long-term UK residence is substituted for domicile for these post-1975 treaties, so the treaty operates exactly as it always has.
The consequence is more interesting than it first appears. Let us assume that our American client is now going to be treated as UK-domiciled for treaty purposes by reason of his long-term residence. But he is also US-domiciled for treaty purposes, because the treaty treats anyone who was a US resident or national at any time in the preceding three years as US-domiciled. He is therefore domiciled in both places at once – in other words, he has dual treaty domicile – and where that arises the treaty applies a series of tie-breaker tests, in strict order, until one of those tests resolves the position.
The tie-breakers
The first test is whether he has a permanent home available to him in one country but not the other. The client may only have a permanent home in one jurisdiction, in which case the matter will be settled, but if he has one in both, this test settles nothing and we move on to the next test.
The second is the centre of vital interests – where his personal and economic relations, social, domestic, financial and cultural – are closer. Centre of vital interests is a somewhat nebulous concept and would probably justify a blog article on its own; although the facts may appear to point one way rather than the other, this can be an uncomfortable test to rely on. And life being what it is, a person’s ‘vital interests’ may shift as time passes.
The third test is habitual abode, which looks at the frequency, duration and regularity of time spent in each country. For someone spending substantial periods here, this may also be potentially dangerous to rely on.
The fourth and final test is nationality: a US national who is not also a UK national is treated as US treaty domiciled, even if the earlier tests were inconclusive.
If none of the four tests provide a definitive outcome, the two countries’ competent authorities, HMRC and the IRS, must reach a mutual agreement, the outcome of which may take some time and be difficult to predict.
The effects of US treaty domicile
If our American is treaty domiciled in the US, the treaty restricts the UK’s taxing rights to certain categories of UK property only, including UK real property. This is obviously an excellent result as estate tax thresholds are much higher in the US than in the UK; not only will only a modest amount of UK IHT be paid but the US assets may also escape tax there.
But if he is treaty domiciled in the UK, the picture is very different, and potentially catastrophic. The whole worldwide estate is subject to UK IHT. And if there is no US estate tax payable, there is clearly no tax credit relief either.
The traps
Three points are worth pressing on any American client in this position. The first follows from the ordering.
Because the permanent home test comes first in the order, a client who is a long-term resident in the UK (as defined) and gives up his US permanent home but retains one in the UK will immediately become treaty domiciled in the UK with potentially disastrous consequences.
The second is evidential: the remaining tests turn on facts, and facts are far easier to establish while they are fresh. In practice, as inheritance tax is most often paid on death, it will be the client’s personal representatives who will have to demonstrate those facts when the time comes. The client should make it as easy as possible for his personal representatives to make the case that the treaty applies to him on his death. Even if the treaty applies and no IHT is payable, the personal representatives will still have to submit an IHT account to HMRC and prove the claim under the treaty.
The final point concerns the UK home itself. Clients often ask whether they can simply give it away, but the gift with reservation of benefit rules keep any asset the donor goes on using, without paying a market rent for it, within the estate for IHT purposes. Where he intends to keep living there, gifting it is likely to achieve nothing but the loss of CGT uplift on death, so the answer is usually to fund any residual IHT liability instead. An alternative might be to consider securing a loan on the property and using the proceeds to invest outside of the UK; but that is a point for another blog post.