Understanding the complexities of estate planning is vital for anyone with international ties, and individuals holding dual UK-US citizenship face an especially intricate set of challenges. Navigating the intersection of two sophisticated legal systems, varied tax rules, and differing inheritance laws requires careful strategy. Not only must dual citizens remain compliant with both the United Kingdom and the United States, but they also have the added responsibility of ensuring that their intentions are efficiently executed and that their beneficiaries are not burdened with unnecessary complications.
Proper estate planning for individuals with dual UK-US citizenship involves numerous considerations that go beyond the scope of standard wills and trusts. Residency, domicile, asset location, taxation, and the recognition of estate planning instruments across jurisdictions all play significant roles. This blog article aims to explore these issues in depth and provide practical guidance for dual citizens seeking to organise their affairs effectively.
For dual UK-US citizens, understanding how each jurisdiction defines residency and domicile is essential. These classifications affect not only which country has primary oversight over the estate but also help determine the tax treatment of assets both during life and upon death.
In the United Kingdom, “domicile” is a key concept rather than “residency” when it comes to inheritance tax. A person can be a UK tax resident but not necessarily UK-domiciled. Domicile is broadly defined as the country a person treats as their permanent home, and changing one’s domicile takes careful planning and strong evidence of intent. The UK also applies “deemed domicile” rules, where long-term residents may be considered domiciled for tax purposes even if they were originally domiciled elsewhere.
Conversely, the United States applies global taxation to its citizens, regardless of where they reside or where their assets are located. A dual UK-US citizen is always considered a US taxpayer, and the IRS expects annual tax returns from all American citizens, even those who have not lived in the country for many years. This global reach includes estate and gift taxes, which apply to worldwide assets.
The distinction between residency and domicile means that a dual citizen could face inheritance tax liabilities in both countries upon death, potentially leading to double taxation if not planned for appropriately.
Both the United Kingdom and the United States levy death taxes—referred to as Inheritance Tax (IHT) in the UK and Estate Tax in the US. While similar in purpose, the mechanisms, exemptions, and rates differ between the two countries.
In the UK, IHT is generally levied at 40% on estates above the nil-rate band, which is currently £325,000. Additional allowances, such as the residence nil-rate band, may apply when a main residence is passed on to direct descendants. UK-domiciled individuals are subject to IHT on their worldwide assets, while non-UK domiciled individuals are taxed only on assets located in the UK unless they fall under the deemed domicile rules.
The US estate tax also starts with a generous exemption—currently over $13 million per individual as of 2024—but the rate can be as high as 40% for estates exceeding this threshold. Importantly, unlike the UK, the US applies this tax to all assets globally for its citizens, regardless of domicile or physical residence. Spousal exemptions are available, but only if the surviving spouse is also a US citizen; otherwise, the exemption is limited and may require creating a qualified domestic trust (QDOT) to gain tax deferral benefits.
The interaction between the two tax regimes means that a dual citizen could, in theory, be taxed twice on the same assets. To address this, the countries have entered into a bilateral estate and gift tax treaty, which aims to reduce instances of double taxation and provide a mechanism for one country to grant a credit for tax paid in the other.
The treaty, officially titled the “Convention Between the Government of the United States of America and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Estates of Deceased Persons and on Gifts,” came into force in 1980.
It outlines how dual citizens or cross-border estates should be treated and provides key provisions to determine domicile, the country of taxing rights, and the possibility of tax credits or relief. For example, certain tie-breaker rules are applied to establish where an individual is considered domiciled for estate tax purposes if both countries claim taxation rights. The treaty also allows for credits in one country for tax paid in another, minimising the total tax burden when properly applied.
However, application of the treaty is not automatic and typically requires submitting formal elections and supporting documentation. It is crucial to seek the advice of professionals experienced in cross-border estate planning to ensure appropriate claims are made and deadlines are met.
Trusts are a common and effective estate planning tool, providing control, privacy, asset protection, and efficiency in distributing wealth. However, the treatment of trusts varies significantly between the UK and the US.
In the United States, trusts are widely used, and there is broad flexibility in how they operate. Revocable living trusts, irrevocable trusts, and charitable trusts are all commonplace tools. The tax treatment depends on whether a trust is considered grantor or non-grantor, with implications for who is responsible for paying income tax on trust assets.
In the United Kingdom, trusts are subject to their own regime of taxation. For example, relevant property trusts may be subject to a 10-year periodic charge of up to 6%, as well as exit charges when assets are distributed. There is also a growing emphasis on transparency, with reporting requirements under the UK Trust Registration Service.
For dual citizens, establishing a trust that is tax-efficient and compliant in both jurisdictions can be a minefield. A trust that is advantageous under US tax law may create unexpected liabilities in the UK, and vice versa. Determining the residency of a trust, the classification of its beneficiaries, and how it should report its income is difficult without expert guidance.
Another complication arises in reporting obligations. US citizens, including dual citizens residing abroad, must comply with Foreign Bank Account Reporting (FBAR) and the Foreign Account Tax Compliance Act (FATCA), which may require disclosing interests in foreign trusts or companies, regardless of whether those assets generate income.
Drafting an effective and enforceable will is a fundamental task in estate planning. However, where more than one legal system is involved, it becomes critical to ensure that local and foreign laws do not conflict, resulting in an outcome contrary to the testator’s intentions.
Some dual citizens choose to create separate wills—one for their UK assets and another for their US holdings. While this can be advantageous in dealing with local probate authorities, it introduces challenges in coordination and interpretation. Unless drafted carefully, multiple wills can inadvertently revoke one another or create inconsistencies that delay distribution.
In both the UK and the US, the principle of testamentary freedom generally applies, meaning individuals can leave their assets to whomever they choose. However, in certain parts of the UK (particularly Scotland), forced heirship laws may exist, and in the US, community property rules in states such as California may impose limits on how an estate can be distributed.
Executing wills in a cross-border context also demands attention to formalities. A will validly executed in one country may not meet the formal legal requirements in another. Fortunately, several international conventions—such as The Hague Convention on the Conflict of Laws Relating to the Form of Testamentary Dispositions—can help ensure recognition of foreign wills, but reliance on these should not be assumed without legal review.
Making gifts during one’s lifetime is an effective estate-planning strategy, but the rules surrounding gift tax differ significantly between the two jurisdictions.
In the UK, lifetime gifts between individuals are generally exempt from immediate taxation, provided the donor survives for seven years from the date of the gift. This concept, known as “potentially exempt transfers,” allows individuals to reduce the size of their taxable estate over time. There are also annual exemptions and allowances for wedding gifts and gifts out of surplus income.
In the US, the gift tax is integrated with the estate tax, and the IRS applies a lifetime exemption limit—over $13 million as of 2024—for both gifts and estates. Annual exclusions are also available (currently $17,000 per recipient per year) and do not count towards the lifetime exemption.
For dual citizens, it’s possible to make gifts that are exempt in one country but taxable in the other. Additionally, foreign exchange rate fluctuations may complicate valuations for reporting purposes. It’s also important to consider reporting thresholds; for example, the IRS requires the filing of Form 3520 in connection with certain foreign gifts or bequests, while HMRC has its disclosure requirements for lifetime transfers.
An increasingly relevant aspect of estate planning for global citizens is the treatment and accessibility of digital assets, such as online accounts, cryptocurrencies, and intellectual property. These assets often have no clear location, raising complex questions about jurisdiction, legal ownership, and digital rights.
Ensuring that digital assets are included in an estate plan is vital. Proper documentation, such as passwords, digital vaults, and instructions for executors, can facilitate smooth access while maintaining privacy. Dual citizens must be mindful that varying levels of legal recognition for digital assets exist between the UK and the US, and some platforms may only recognise legal demands from domestic courts.
Estate planning is not only about distributing wealth after death. Forward-thinking individuals also consider disability and mental incapacity. Legal tools such as powers of attorney (POA), health care proxies, and living wills provide the means for trusted individuals to make decisions on one’s behalf.
In the UK, this is typically achieved through a Lasting Power of Attorney (LPA), which comes in two forms: one for property and financial affairs, and another for health and welfare. In the US, equivalents include Durable Powers of Attorney for finances and Health Care Directives (also called Advance Directives or Living Wills) for medical decisions.
For dual UK–US citizens, the challenge is ensuring that these documents are recognised and enforceable in both jurisdictions. A UK LPA may not be automatically accepted in the US, and vice versa. This can cause delays or disputes at critical moments. Where significant assets or health care decisions could be managed in both countries, it is often advisable to create separate POAs tailored to each jurisdiction, ensuring that local legal requirements are met.
Clarify domicile and residency status early – These determine tax exposure and can be difficult to change retroactively.
Leverage the UK–US estate and gift tax treaty – It can prevent double taxation, but only if actively applied for and documented.
Coordinate wills and powers of attorney – Draft them so they work together across jurisdictions without revoking or conflicting with each other.
Be strategic with trusts – A structure that works in one country can trigger unintended tax consequences in the other.
Consider lifetime gifting – Use exemptions and allowances in both systems to reduce taxable estates over time.
Don’t overlook digital assets and incapacity planning – Cross-border recognition and access require forethought.
Cross-border estate planning for dual UK–US citizens is a complex undertaking that blends legal, tax, and practical considerations. The best outcomes arise from working with advisers experienced in both jurisdictions, who can coordinate a strategy that respects the rules of each while honouring personal wishes. Done well, it not only preserves wealth but also spares heirs from unnecessary administrative burdens, ensuring a smoother transition for the next generation.
Privacy Policy
Terms and Conditions
Disclaimer
COPYRIGHT © 2024 MY WILL AND PROBATE
