he UK’s Inheritance Tax (IHT) regime differs significantly from the US estate tax system and can have important implications for US citizens with UK connections. Individuals who become long-term UK residents may find that their worldwide estate falls within the scope of UK IHT, making early estate planning essential.

Long-Term Residence and IHT Exposure

An individual generally becomes a long-term resident for IHT purposes after being UK tax resident for at least ten of the previous twenty tax years. Once this threshold is met, their worldwide estate may become subject to UK IHT, with long-term resident status potentially continuing for up to ten years after leaving the UK.

The UK’s nil-rate band remains £325,000, significantly lower than the current US estate tax exemption, with IHT generally charged at 40% on assets above the available thresholds. An additional residence nil-rate band may also be available in certain circumstances.

Trusts and Estate Planning

Trusts are subject to a separate IHT regime, with potential tax charges arising when assets are settled into trust, on ten-year anniversaries, on certain distributions, and in some cases on the settlor’s death. The applicable rules depend on factors including the settlor’s residence status and the type of trust involved.

Careful estate planning can help mitigate potential tax liabilities. Tax-efficient wills, appropriately structured life insurance policies, and the provisions of the UK-US Estate and Gift Tax Treaty can all play an important role in reducing the risk of double taxation and preserving wealth for future generations.

Practical Takeaways

US citizens living in, or planning to move to, the UK should review their estate planning arrangements at an early stage. Understanding the UK’s long-term residence rules, the treatment of trusts, and the interaction between the UK and US tax systems can help minimise inheritance tax exposure and avoid unexpected tax consequences.

The IRS is increasingly challenging claims for reasonable cause relief related to late international information returns, focusing particularly on taxpayers’ reliance on tax preparation software like TurboTax.

In a notable case, Zhang v. IRS, the government contends that taxpayer Zhang cannot claim reasonable cause for her late Form 3520 filing because TurboTax did not provide guidance on it. Despite Zhang’s background as a CPA and her reliance on the software, the IRS argues that she should have independently verified her reporting obligations.

In 2017, Zhang received significant foreign gifts but only realized she missed the Form 3520 deadline in 2018 after reading an article on the topic. After filing the form, she faced a $71,777 penalty, which was partially reduced after an appeal. The IRS’s position leans on the Supreme Court’s Boyle decision, suggesting blind reliance on tax software does not constitute reasonable cause. Critics argue this stance fails to reflect the realities faced by new U.S. residents unfamiliar with complex filing requirements.

Overall, Zhang’s case highlights the difficulties taxpayers encounter when trying to comply with international reporting obligations, as the IRS aims to enforce penalties strictly, potentially discouraging voluntary compliance from others who might miss deadlines.

Taxpayers in similar situations are advised to submit strong reasonable cause statements to improve chances of penalty relief.

HMRC’s consultation in June 2026 proposes amending the treatment of U.S. LLCs and other reverse hybrid entities for individuals who are resident in the UK, by recognising them as transparent for UK income tax and capital gains tax purposes. This initiative aims to resolve longstanding discrepancies between US and UK tax treatments, which currently result in exceptionally high effective tax rates sometimes exceeding 75% due to individuals being taxed on underlying US profits and subsequently subject to UK tax on distributions. HMRC also notes ongoing uncertainties following the Anson case, which conflicted with its published guidance that LLCs are generally considered opaque entities.

Under the proposed approach, individuals would be taxed on the underlying profits and gains of the LLC, with distributions no longer subject to UK income tax. This would enable appropriate double taxation relief, as the tax liability would be aligned with the underlying profits. For UK purposes, the activities of the LLC would be treated similarly to a partnership. The new regime might apply automatically; however, HMRC is also considering the possibility of an irrevocable election. It should be noted that these rules would not apply where the entity is UK-resident or trading through a UK permanent establishment. Consequently, certain structures particularly US LLCs controlled from the UK may continue to face high effective tax rates.

The consultation confirms that corporate entities will not benefit from equivalent transparency treatment, leaving unresolved issues related to financing, group tracing, and share capital testing. Additionally, mixed-member LLCs could become complex, with individuals potentially treating such entities as transparent, while corporations regard them as opaque. The consultation period remains open until 31 July 2026, with no indication at this stage as to when any new regime might come into force.

HMRC has published a consultation proposing significant changes to the reporting obligations for close companies. If implemented, the new rules would require companies to report a much wider range of transactions with their participators, reflecting HMRC’s continued focus on improving tax transparency and reducing non-compliance.

The consultation, published on 19 March 2026, forms part of HMRC’s wider efforts to tackle the small business corporation tax gap, which it believes has been driven in part by the blurring of company and personal finances. Under the current regime, reporting is largely limited to situations where a section 455 tax charge arises on loans to participators. HMRC considers this approach too narrow, as it provides little visibility over many other transactions between close companies and their owners.

Under the proposals, close companies would be required to report a broader range of transactions, including loans, cash payments, dividends, asset transfers, loan repayments and loan write-offs. For each transaction, companies would be expected to provide information such as the identity of the participator, the value of the transaction and the date it took place. Although HMRC’s preferred approach is annual reporting alongside the corporation tax return, more frequent reporting has not been ruled out.

While the proposals are primarily aimed at owner-managed businesses, their impact could extend much further. Many privately owned groups and private equity-backed businesses also fall within the definition of a close company and could face a significant increase in compliance obligations. In particular, reporting requirements for intra-group transactions may create additional administrative burdens and could overlap with other reporting regimes, including the International Controlled Transactions Schedule.

The consultation also leaves a number of important questions unanswered, including how the new rules will apply to group structures, partnership-owned businesses and existing exemptions within the loans to participators regime. Businesses that may be affected should monitor developments closely, as the final rules could represent a substantial change to the reporting framework for close companies.

Recent geopolitical events, including ongoing conflict in the Middle East, have brought renewed attention to the “exceptional circumstances” provisions within the UK Statutory Residence Test (SRT).

This is particularly relevant for globally mobile individuals who are seeking to remain non-UK tax resident but have spent more time in the UK than planned due to events outside their control.

Under the SRT, individuals may be able to disregard up to 60 UK days where their presence in the UK is caused by exceptional circumstances beyond their control. However, this only applies to certain parts of the SRT and is not a general exemption. The individual must also intend to leave the UK as soon as the circumstances allow.

HMRC guidance suggests that exceptional circumstances may include natural disasters, civil unrest, war, or sudden serious or life-threatening illness or injury. Foreign, Commonwealth and Development Office (FCDO) travel advice may also be relevant, although HMRC has made clear that it will not be the deciding factor on its own.

In April 2026, the Society of Trust and Estate Practitioners (STEP) asked HMRC for further clarification on how the rules should apply where travel to a particular region becomes unsafe. STEP specifically asked about the difference between FCDO advice against “all travel” and “all but essential travel”, and whether individuals affected by conflict could disregard UK days where they remained in the UK rather than returning overseas.

HMRC’s response was cautious. It confirmed that no blanket assurance can be given and that each case will depend on the individual’s facts and circumstances. FCDO advice may be considered, but it will not automatically determine whether exceptional circumstances apply.

The position therefore remains highly fact specific. Recent case law also shows that HMRC is likely to interpret the exemption narrowly. Affected individuals should not assume that UK days will be disregarded without taking specific professional advice.

As a practical point, globally mobile individuals should maintain a buffer of UK days rather than spending up to the maximum allowed under the SRT. This helps reduce the risk of becoming UK tax resident where unexpected events arise but do not ultimately qualify as exceptional circumstances.

When an estate includes overseas assets, executors can face inheritance or estate tax charges in more than one country. Many assume relief is only available where the UK has a double tax treaty, but the UK’s inheritance tax (IHT) treaty network is surprisingly limited.

Overseas property, bank accounts or investments can create a risk of the same asset being taxed twice. While this can complicate estate administration, double taxation is not always unavoidable.

The UK has IHT treaties with only six countries: South Africa, the USA, the Netherlands, the Republic of Ireland, Sweden and Switzerland plus a small number of older estate duty treaties (France, Italy, India and Pakistan). As a result, treaty relief is often unavailable.

In many cases, unilateral relief may provide the answer. This relief can reduce UK IHT where foreign tax has been paid on the same overseas asset. However, eligibility depends on factors such as the nature of the foreign tax, the asset involved, and where the asset is treated as situated under UK law. Any credit is generally capped at the amount of UK tax attributable to that asset.

A common mistake is to assume that paying foreign tax automatically entitles the estate to UK relief. Executors must carefully consider how the asset is characterised and whether the foreign tax qualifies for credit.

For estates with an international element, early specialist advice is essential. Key questions include:

• Is there an applicable IHT treaty?
• If not, can unilateral relief apply?
• How is the asset classified and where is it situated for UK tax purposes?

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U.S. immigration status and U.S. tax residency are often assumed to be the same, however they operate under separate rules. An individual may not be considered a U.S. resident for immigration purposes but could still be treated as a U.S. tax resident.

The United States applies a worldwide taxation system, meaning individuals classified as “U.S. persons” for tax purposes may be subject to U.S. tax on their global income, regardless of where the income arises. This can include overseas employment income, foreign rental income, dividends from non-U.S. companies, and capital gains realised outside the United States.

Tests for U.S. Tax Residency

U.S. tax residency is generally determined under one of the following tests:

• Citizenship – U.S. citizens are taxed on worldwide income regardless of where they live.
• Green Card Test – Individuals who hold lawful permanent resident status are typically treated as U.S. tax residents.
• Substantial Presence Test – Tax residency may arise where an individual spends sufficient days in the U.S. over a rolling three-year period.

Exceptions and Timing Considerations

Certain visa holders, including individuals temporarily present under F-1, M-1, Q, or J-1 visas, may be able to exclude days from the substantial presence calculation for a limited period. Medical circumstances may also affect how days of presence are counted.

The timing of entry into the U.S. can impact whether worldwide income or gains fall within scope of U.S. taxation in a particular year.

Practical Takeaway

Immigration status does not automatically determine U.S. tax residency. Individuals with U.S. connections should consider the residency tests and timing implications carefully to avoid unexpected tax exposure and ensure compliance with reporting obligations.

Non-U.S. individuals who invest in, work in, or transfer assets into or out of the United States face a complex tax landscape. The U.S. tax system distinguishes sharply between U.S. persons and non-resident aliens (NRAs), and understanding these distinctions is essential for effective planning. As the source document notes, “Persons who are neither U.S. citizens nor U.S. residents are subject to U.S. taxes” only in specific circumstances.

Income Tax Exposure

NRAs are taxed only on certain categories of U.S.-source income:

• Fixed or determinable annual or periodical income,such as dividends from U.S. corporations, passive rents, royalties, and some service payments. These are generally taxed at a flat 30% rate.
• Effectively connected income (ECI)from a U.S. trade or business, including wages for services performed in the U.S. and income from actively managed rental properties. ECI is taxed at graduated rates like U.S. taxpayers.

Special rules apply to real estate. Under FIRPTA, gains from the sale of U.S. real property interests are treated as ECI, and buyers must withhold 15% of the purchase price.

Estate Tax Exposure

NRAs face U.S. estate tax only on U.S.-situs assets, and the exemption is dramatically lower than for U.S. citizens just $60,000. The article explains that U.S.-situs property includes real estate, tangible personal property located in the U.S., shares of U.S. corporations, and certain debt obligations. Bank deposits with U.S. banks, however, are excluded.

Estate tax treaties with countries such as France, Germany, the U.K., and Japan may provide relief, including increased exemptions or marital deductions.

Gift Tax Rules

NRAs are subject to U.S. gift tax only on gifts of U.S.-situs real estate and tangible personal property located in the U.S. Gifts of intangible property such as shares of U.S. corporations are not subject to gift tax. However, gifts of cash made within the United States may be taxable, so cross-border planning is essential.

U.S. recipients of gifts from foreign individuals must report gifts exceeding $100,000 on Form 3520. As the document notes, “the penalty for failure to report the gifts is severe,” potentially reaching 25% of the gift’s value.

Generation-Skipping Transfer Tax

GST tax applies to NRAs only when the transfer is already subject to U.S. estate or gift tax meaning it applies only to U.S.-situs property.

The Role of Treaties

Tax treaties can significantly alter outcomes by reducing withholding rates, redefining situs rules, or increasing estate tax exemptions. However, the U.S. does not enter treaties that exempt U.S. citizens from worldwide taxation.

Conclusion

For non-U.S. individuals, U.S. tax exposure depends heavily on the type and location of assets, the nature of income, and the presence of applicable treaties. Because the rules differ sharply from those applied to U.S. citizens and residents, proactive planning is essential to avoid unexpected tax liabilities and reporting penalties.

On 26 March 2026, the IRS released its latest Tax Time Guide (IR-2026-41), encouraging taxpayers who have not yet filed or paid their taxes to take early action. The guidance highlights practical steps individuals can take to reduce penalties and interest, avoid delays, and resolve outstanding tax issues more efficiently.

Key Guidance for Taxpayers

The IRS emphasises the importance of filing tax returns as soon as possible, even where full payment cannot be made. Filing promptly can reduce failure-to-file penalties and enables taxpayers to access payment arrangements.

Taxpayers are also reminded to ensure returns are accurate by reporting all income and correctly claiming deductions, including those on Schedule 1-A, supported by appropriate records.

Electronic filing is recommended as the fastest and most reliable method, helping to avoid delays associated with postal submissions and postmark timing issues. Where tax is owed, making partial payments can help limit the accrual of penalties and interest.

Payment Options and Compliance

For those unable to pay in full, the IRS highlights the availability of instalment agreements, which can be set up online. Taxpayers are also encouraged to respond promptly to any IRS notices, as delays may lead to additional penalties or prolonged resolution.

The IRS continues to promote the use of its online tools, including the Individual Online Account, “Where’s My Refund?”, Direct Pay, and the Document Upload Tool, to help taxpayers manage their obligations efficiently.

Practical Takeaways

Taxpayers should take early, proactive steps to manage their tax position. Filing on time, making payments where possible, and engaging promptly with IRS communications can significantly reduce penalties and improve resolution outcomes.