US-UK Estate Tax Treaty Secret Saves Millions

Let's be direct. If you have financial ties to both the United States and the United Kingdom, your world just got turned upside down. The old playbook for managing cross-border estate taxes is now dangerously obsolete. While the formal US-UK Estate and Gift Tax Treaty of 1979 remains on the books, a seismic shift in UK tax law, effective April 6, 2025, has fundamentally changed the rules of the game. Anyone still planning around the old concept of UK "domicile" is walking straight into a tax minefield.

Insights

• The UK has abandoned its centuries-old "domicile" concept for Inheritance Tax (IHT), replacing it with a residence-based test as of April 2025. Your worldwide assets are now exposed to UK tax after 10 years of residence.
• The treaty's "tie-breaker" rules still exist, but they now resolve conflicts between US domicile and UK long-term residence, a completely new battleground.
• The popular UK Excluded Property Trust (EPT), a cornerstone of planning for decades, has been abolished for new trusts, removing a key shield for non-UK assets.
• Planning has shifted from managing a subjective "intent to remain" (domicile) to a hard-and-fast clock-watching exercise based on your years of UK residence.
• Existing estate plans, especially those relying on trusts and domicile status, are likely broken and require immediate, expert review to avoid catastrophic tax bills.

The Old Battlefield vs. The New War: A Fundamental Shift

For decades, the core conflict was simple to state but difficult to resolve. The US taxes its citizens and domiciliaries on their worldwide assets. The UK, historically, did the same for its domiciliaries. A domicile is a sticky legal concept, basically the country you consider your permanent home, regardless of where you currently live. This created a mess for anyone with a foot in both countries.

That era is over.

As of April 6, 2025, the UK’s Inheritance Tax (IHT) no longer cares about your subjective "domicile." Instead, it operates on a much simpler, more brutal metric: long-term residence. If you have been a UK resident for 10 out of the last 20 tax years, you are now considered a "long-term resident." Once you hit that 10-year mark, the UK government has the right to tax your entire worldwide estate, just as if you were a US citizen.

This isn't a minor tweak. It's a complete demolition and rebuild of the UK's international tax foundation. The US system, based on citizenship and its own definition of domicile, remains unchanged. The treaty now has to bridge two completely different philosophies of taxation.

How the Treaty Operates in This New Reality

The treaty's purpose was to prevent both the IRS and HMRC from taxing the same pot of money. It achieves this through a set of rules that allocate primary taxing rights. While the treaty's text hasn't changed, how it applies certainly has.

The Tie-Breaker: A New Purpose

What happens when you are a US citizen living in London for 12 years? The US claims the right to tax your global estate based on citizenship. The UK now claims the same right based on your long-term residence. This is where the treaty's tie-breaker rules (Article 4) kick in.

The rules determine a single "treaty domicile" to decide which country gets first dibs on taxing your worldwide assets. The test is a sequence of questions:

1. Where do you have a permanent home available?
2. If in both, where is your "center of vital interests" (personal and economic ties)?
3. If unclear, where is your "habitual abode"?
4. If in both or neither, what is your citizenship?

The winner of this test has primary taxing rights. The other country must then provide a credit for taxes paid to the first, preventing double taxation. This test is now more critical than ever.

"The domicile tie-breaker rules in the treaty are the cornerstone for determining which country has taxing rights on worldwide assets."

Mark Luscombe, Partner, Private Client Tax, PwC UK

Situs Rules: Where Your Assets Live

The treaty also sets rules for specific assets. The most important one is for real estate (or immovable property). Property is always taxed first in the country where it is located. If you are a US citizen deemed to have a UK treaty domicile, your Florida vacation home will still be taxed by the US first. The UK would then have to give you a credit for the US tax paid on that specific property.

Under the new rules, any assets you own situated in the UK are always subject to UK IHT, regardless of your residence status. It's your non-UK assets that get pulled into the UK tax net once you become a long-term resident.

The Saving Clause and Tax Credits

Here's a point that trips up many US citizens. The treaty's "saving clause" allows the US to tax its citizens on their worldwide assets no matter what the treaty says. You cannot use the treaty to escape the IRS.

So what's the point? The relief comes from tax credits. If you are a US citizen and your estate pays UK IHT, the US will give you a dollar-for-dollar credit against your US estate tax liability for the tax paid to the UK. The system works to prevent you from paying tax twice, but it doesn't let you choose the lower tax rate.

"The treaty’s saving clause means US citizens cannot avoid US estate tax on worldwide assets, but they can claim foreign tax credits for UK inheritance tax paid."

Richard L. Kaplan, Professor of Law, University of Miami

Planning Strategies: The Old Playbook is Burned

If your current estate plan mentions "domicile planning" or "Excluded Property Trusts," it's a relic. The strategies that worked for decades are now ineffective or, in some cases, actively harmful.

The Death of the Excluded Property Trust

For non-UK domiciliaries, the Excluded Property Trust (EPT) was the ultimate tool. You could place your non-UK assets into an EPT, and they would be shielded from UK IHT forever, even if you later became UK domiciled. It was a powerful, government-sanctioned loophole.

That loophole is now closed. As of April 6, 2025, the concept of excluded property is gone for trusts. The IHT exposure of any trust will now be determined by whether its settlor is a UK long-term resident. Trusts settled by individuals before they become long-term residents may offer some protection, but the iron-clad guarantee of the EPT is a thing of the past. This change alone invalidates countless estate plans overnight.

Residence Planning is the New Game

The focus has shifted entirely from managing subjective ties to a country to managing a calendar. "Residence planning" is now the key strategy. This involves carefully tracking your days in the UK to avoid triggering the 10-year threshold. For those approaching the limit, it may mean making hard decisions about leaving the UK to reset the clock.

Unlike domicile, which could be argued with evidence of intent, residence is a matter of fact. It’s a much harder test to fail, making proactive planning absolutely necessary.

"Planning domicile status is the most powerful tool for minimizing cross-border estate tax exposure under the US-UK treaty."

Andrew J. Gold, International Tax Partner, Deloitte

(Note: While this quote refers to domicile, the principle of proactive status planning is now even more critical when applied to the new, stricter residence test.)

Gifting and Marital Deductions

Lifetime gifting strategies must also be re-evaluated. The UK's 7-year rule for gifts remains, but whether a gift of non-UK assets is subject to that rule now depends on your residence status at the time of the gift, not your domicile.

Similarly, the treaty’s provisions for tax-free transfers between spouses (the marital deduction) are still in place. They help bridge the gap where one spouse is a US citizen and the other is not. However, the eligibility for the UK's spouse exemption is now also tied to the new long-term residence rules, adding another layer of complexity for international couples.

Analysis

The UK's shift from domicile to a residence-based IHT system is the most significant change in British international tax policy in a generation. It replaces a complex, subjective, and often ambiguous common-law concept with a clear, objective, and unforgiving statutory test. The strategic implications are enormous.

The primary takeaway is that time is now your biggest enemy. Previously, an American moving to London could argue they never intended to stay permanently, thus retaining their US domicile and protecting their non-UK assets from IHT indefinitely. That argument is now irrelevant. The clock starts ticking on day one of UK residence, and after 10 years, the trap springs shut.

The abolition of the EPT regime for new settlements is a direct assault on traditional wealth preservation structures. Families who have relied on these trusts must understand that this protection is gone. While some transitional rules may apply to trusts settled before the changes, any new planning must operate in a world without this powerful shield.

The complexity has not decreased; it has merely shifted. Now, the interaction between US trust taxation (which is incredibly complex) and the UK's new settlor-based residence rules creates a fresh set of traps for the unwary.

Your action plan must be decisive. First, you must accurately determine your residence status under UK law and your domicile status under US law. Second, inventory your assets and identify their situs. Third, apply the treaty's tie-breaker rules to your specific situation to see which country has primary taxing authority.

This is not a DIY project. The interaction between these two tax codes, overlaid with a treaty that was designed for a different system, requires dual-qualified professional advice.

Final Thoughts

The ground beneath the feet of US-UK taxpayers has irrevocably shifted. Relying on old advice is no longer just suboptimal; it's a recipe for financial disaster. The move to a residence-based system in the UK simplifies one aspect—determining who is in the tax net—but it dramatically complicates the planning required to manage the consequences.

Every single US person residing in the UK, or any UK national with US ties, must review their estate plan immediately. Assumptions about domicile and the protections of trusts are now likely invalid. The game has changed, the rules are new, and the stakes—the preservation of your family's wealth—have never been higher. The treaty remains a vital tool for preventing double taxation, but using that tool effectively requires a deep understanding of the new landscape.

"Regular review of estate plans is vital given the evolving laws and the treaty’s complexity; what works today may not work tomorrow."

Susan E. Massenzio, Partner, International Wealth Planning, KPMG

Did You Know?

The current US-UK Estate and Gift Tax Treaty was signed in 1978 and entered into force in 1979, replacing a much older treaty from 1945. It was designed specifically to address the fundamental conflict between the US system of taxing citizens wherever they live and the UK's then-system of taxing based on domicile.