GIFTS AND INHERITANCES: HOW THE UK AND US RULES INTERACT

by John McLaughlin, in , ,

PJD Tax does not provide inheritance tax or estate planning advice. This article is intended to raise awareness of how the UK and US rules interact — particularly where gifting affects income tax and capital gains tax, which are within our remit. For IHT or estate planning advice you should speak to a suitably qualified adviser, and we would be happy to work alongside them.

There are many misconceptions about the tax consequences of making gifts, and for individuals within both the UK and US systems the two sets of rules interact in ways that can produce unexpected results — including the same gain being taxed twice within one family. Here is a brief overview.

The UK: inheritance tax

The UK does not have a standalone gift tax. Lifetime gifts are dealt with through the inheritance tax (IHT) rules, which is why IHT is not purely a “death tax”.

Since 6 April 2025, the scope of IHT depends on residence rather than domicile. A long-term resident — broadly, someone who has been UK resident in at least 10 of the previous 20 tax years — is within the scope of IHT on their worldwide assets. Anyone else is within scope on UK assets only.

Key features of the lifetime rules:

  • Each individual has a nil rate band of £325,000 (frozen until April 2030), with a residence nil rate band of up to £175,000 available against a home left to direct descendants on death.
  • Most outright lifetime gifts to individuals are potentially exempt transfers (PETs). No IHT is due when the gift is made, and if you survive seven years the gift falls out of your estate entirely. If you die within seven years, the gift becomes chargeable and uses up your nil rate band first.
  • Certain gifts are exempt outright: £3,000 per tax year (plus one year’s unused allowance brought forward), small gifts of up to £250 per recipient, wedding gifts within limits, and — often the most valuable and most overlooked — regular gifts made out of surplus income that do not affect your standard of living, which are exempt without limit.
  • Gifts between spouses and civil partners are exempt, but where the recipient spouse is not a long-term resident the exemption is capped at £325,000 unless the recipient elects to be treated as a long-term resident.
  • Giving an asset away while continuing to enjoy it — the family home being the classic example — is caught by the “gift with reservation” rules and remains in your estate.

The US: gift and estate tax

The US operates a unified federal gift and estate tax regime, applying to US citizens and US-domiciled individuals on worldwide assets. The numbers are on an entirely different scale to the UK:

  • Each individual may give up to $19,000 (2026) per recipient per year with no reporting and no use of any allowance. A married couple can elect to “split” gifts, doubling this to $38,000 per recipient — although the election itself requires a gift tax return.
  • Above the annual exclusion, gifts must be reported on Form 709 (due 15 April following the year of the gift) but no tax is usually payable. Instead the excess draws down the lifetime gift and estate tax exemption of $15 million (2026) — made permanent, and indexed, under the 2025 tax legislation. Tax at up to 40% only arises once cumulative lifetime gifts and the death estate exceed the exemption.
  • Gifts between spouses are unlimited where the recipient is a US citizen. Where the recipient spouse is not a US citizen — a very common position for our clients — the unlimited marital deduction is not available and gifts are instead covered by an increased annual exclusion of $194,000 (2026). Citizenship, not a green card, is the test.
  • Non-US persons are within the US gift tax net only on gifts of US-situs real estate and tangible property, with no lifetime exemption available (the $60,000 figure often quoted relates to the estate tax on US-situs assets, not to gifts).

Where gifting meets capital gains tax: the basis rules

This is the area that most often catches out dual UK/US taxpayers, and it is firmly an income tax and CGT issue rather than an estate planning one.

In the UK, a gift of an appreciated asset (other than cash) to anyone except your spouse or civil partner is a deemed disposal at market value. The donor pays CGT on the built-in gain despite receiving no proceeds, and the recipient takes the asset with a base cost equal to that market value. Holdover relief can defer the gain for certain business assets and transfers into trust.

In the US, a gift is a non-recognition event. No tax arises on making the gift — but the recipient inherits the donor’s original cost basis, so the built-in gain travels with the asset. This can generate double taxation exposure where a sale is made in a later year and the taxable gain is higher for US purposes.

Death produces the opposite result. There is no UK CGT on death and beneficiaries take assets at probate value, while the US provides a full step-up in basis to date-of-death value. For heavily appreciated assets, both systems therefore wipe out the built-in gain on death.

Reporting when you receive a gift

Neither the UK nor the US taxes the recipient of a genuine gift on receipt. However, a US person who receives gifts or inheritances from a non-US person totalling more than $100,000 in a year must report them on Form 3520. No tax is due, but the penalties for late filing start at 5% of the gift per month (up to 25%) — a severe outcome for missing what is a purely informational return. Gifts received from someone who expatriated from the US as a “covered expatriate” can also attract a US tax charge on the recipient.

If you are a US person expecting a significant gift or inheritance from a non-US parent or relative, tell your adviser before the funds move. The Form 3520 filing is straightforward when done on time and painful when it is not.

A final word

The UK and US systems apply tax at different points — the UK taxes appreciated assets at gift to the donor; whereas the US applies tax on the eventual sale of the asset to the donee. The traps sit in the gaps between them. PJD Tax is not qualified to advise on inheritance tax or estate planning, but we regularly assist clients with the US gift tax reporting, CGT and basis consequences of lifetime giving, and we are happy to work alongside your solicitor or estate planning adviser to make sure the two halves of the analysis join up.

If you would like to discuss any of the above, please get in touch.