US Estate Tax for non-American owners of US assets

What happens if you die with US assets in your estate as a non-American? It may feel intimidating as a UK executor if you are administering an estate containing US assets. In this article we highlight the US Estate Tax exposure and administrative forms required in this situation.

US Estate Tax for US domiciliaries

If you’re a US domiciliary, which includes US citizens and Green Card Holders, you’re subject to US estate and gift taxation at up to 40%. You are, however, entitled to a substantial lifetime gift and Estate Tax exclusion. This is currently $12.92million, projected to fall to $5million (indexed for inflation) in 2026. If you’re a non-US citizen, your US domicile status is determined by both intentions and actions.

US Estate Tax for non-US domiciliaries

If you’re a non-US domiciliary, you’re subject to US estate and gift taxation on certain types of US assets at up to 40%. However, your exemption at only $60,000 is much lower than that of US domiciliaries. This exception is not indexed for inflation and the exemption is only available for transfers at death.

Because the non-US domiciliary exemption is much lower than for a US domiciliary, many people with US assets could be within the scope of US estate and gift tax.

As a non-US domiciliary, you’re taxed on the value of your US situs assets. Here are some of the most common US assets subject to US Estate Tax:

• US situs real estate property

• Shares in US corporations

• Tangible personal property

• Interests in partnerships that do business in the US

• Partnerships or trusts that own US situs assets

• Bank accounts connected to a US trade or business (but not personal bank accounts)

• US pension plans such as IRAs or 401ks

US Estate Tax relief and exemptions

It’s possible to be domiciled in more than one country. Where this is the case, there may be an Estate Tax treaty that can be relied upon to reduce US Estate Tax exposure, or at least prevent double Estate Tax exposure. Relief may also be available for any US Estate Tax paid as a credit against the Estate Tax of other country.

The US-UK Estate Tax treaty provides a helpful exemption in paragraph 8(5). This limits the Estate Tax exposure of a UK domiciliary national to that of a US domiciliary. For decedents dying in 2023, this means that if the worldwide estate of the UK domiciliary national was valued at $12.92million or less at date of death, the US Estate Tax would be zero, regardless of the value of the US assets.

For a UK domiciliary holding certain US shares, the US-UK Estate Tax Treaty also excludes these from US Estate tax. The combination of these two reliefs means that in most cases, and only real estate or business assets in the US remain subject to US estate tax (after the $60,000 exemption).

An unlimited exemption is available for US situs assets transferred to a US citizen spouse. If the spouse is not a US domiciliary, a special vehicle known as a Qualified Domestic Trust could be established, which would allow for a deferral of the Estate Tax due until the death of the surviving spouse or a capital payment is made from the trust.

US Estate Tax administrative forms

Even if no tax is due, an Estate Tax return (Form 706-NA) will still need to be filed though to claim the US-UK treaty position, if the value of the US assets exceeds $60,000 at date of death. Form 706-NA is required to be filed within nine months of the date of death. An extension effective for six months is available by filing Form 4768.

When the non-resident Estate Tax return has been processed, an Estate Tax Closing Letter will be issued. In some case, US assets will not be released to beneficiaries until this has been issued.

What should you do?

If you’re a non-US domiciliary holding US assets or an executor of an estate containing US assets, you should check the US tax liability and plan ahead to benefit from any available US Estate Tax relief.