US Estate Tax

US Estate Tax for US Citizens and US Domicilaries

US citizens and those domiciled in the US are subject to US estate tax on their worldwide assets.

Each US citizen or US domiciliary is entitled to the basic exclusion amount, which is currently $12,920,000; however, from 1 January 2026, the basic exclusion amount is set to substantially reduce.

The Internal Revenue Service has clarified that those taking advantage of the increased gift tax exclusion amount in effect from 2018 to 2025 will not be adversely impacted after 2025, when the exclusion amount is scheduled to drop to pre-2018 levels.

As such, US citizens and domicilaries may seek to take advantage of the increased allowance to reduce the size of their estate by making lifetime gifts prior to 31 December 2025.

The taxable estate is subject to graduated rates of tax ranging from 18% to 40%.

US Estate Tax for Non-US Citizens and Non-US Domicilaries

On the other hand, non-US citizens and those not domiciled in the US are only subject to US estate tax on US situs assets, which can include:

• US real estate
• Tangible property located in the US
• Certain intangible property, such as US marketable securities, even if the certificates are held abroad or are registered in the name of a nominee
• Debt obligations of a US person; and
• A US trade or business, and bank accounts used in connection with a US trade or business.

Significantly, non-US citizens and those not domiciled in the US are only entitled to an exemption of $60,000 instead of the $12,920,000 exemption granted to US citizens and those domiciled in the US.

The Marital Deduction

An unlimited exemption for bequests to a US citizen spouse from their non-US citizen or non-US domiciled spouse is available.

Importantly, transfers on death between spouses who are both non-US citizens will not be entitled to the marital deduction. As such, a US estate tax liability can arise on the death of the first spouse, and a second US estate tax charge can arise on the death of the surviving spouse.

Further, transfers from the spouse who is a US citizen to their non-US citizen spouse will also not be entitled to the martial deduction.

Whilst property that is bequeathed to a non-US citizen or non-US domiciled spouse does not qualify for the unlimited marital deduction, property passing to the surviving spouse via a qualified domestic trust (“QDOT”) will qualify for the unlimited marital deduction. Importantly, estate tax will arise on any distribution before the date of the death of the surviving spouse from the QDOT and on the value of the property remaining in the QDOT on the date of the death of the surviving spouse.

Treaty Relief

UK domiciled individuals can utilise the United Kingdom-United States Transfer Tax Agreement to provide relief from US estate tax.

Article 5 of the Transfer Tax Agreement provides that the country of a decedent’s domicile has taxing rights over most of the property, irrespective of situs; the exceptions are for immovable property (covered in Article 6) and business property of a permanent establishment and assets pertaining to a fixed base used for the performance of independent personal services (covered in Article 7).

The effect of Article 5 is to give exclusive taxing rights to the country of domicile with respect to all property except that covered by Articles 6 and 7. Certain intangible property, such as US marketable securities, will therefore not be subject to US estate tax.

In addition to Article 5, Article 8 of the Transfer Tax Agreement allows a UK national to limit their exposure to US estate tax by the amount of tax that would have been imposed had the decedent become domiciled in the United States immediately before his death.

Importantly, not all countries have a transfer agreement with the US, and for those countries that do have transfer agreements with the US, not all are as robust as the agreement between the US and the UK.

US Estate Reporting Requirements

On the death of a non-US citizen or non-US domiciled individual, the executor must file Form 706-NA if the date of death value of the decedent’s US situs assets exceeds the filing threshold of $60,000.

This should be filed within nine months after the date of death, unless an extension of time to file is granted.