US UK Inheritance Reporting: What a Beneficiary Files, Year by Year

US UK inheritance reporting: an introduction

US UK inheritance reporting follows the money, not the funeral. When a parent in Britain dies and you are a US person, you usually owe no US tax on the inheritance itself. However, you may owe a Form 3520, new account reports and tax on income the estate earned after death. Each of those lands in the US year the executor actually pays you.

This article supports our guide to US and UK tax returns prepared together. We cover a US citizen or green card holder who inherits from a parent who was not a US person. Large lifetime gifts are covered separately in our article on a gift from UK parents.

Why US UK inheritance reporting is a timeline problem

An English estate is rarely settled in one go. The executor values the assets, pays any inheritance tax, applies for the grant, sells or transfers property and then distributes. That can take a year or more. Consequently, one death can touch two or three of your US tax years. Most guidance gives you the forms. Instead, we map the forms onto the stages of a real administration.

Who this article is for

We write for US persons living in either country who are named in a UK will or inherit under the intestacy rules. An executor is the person the will appoints to deal with the estate. A beneficiary is anyone entitled to receive something from it. Where the estate holds a trust that continues after the administration ends, different rules apply, and we leave those aside.

Which US tax year does a UK inheritance belong to?

It belongs to the year you receive it. The Form 3520 test counts what you received during your tax year, so the date of death does not fix the year on its own. A bequest paid in two instalments across two calendar years is counted in two years. That is the first rule of US UK inheritance reporting.

The Form 3520 test

The IRS page on gifts from foreign persons sets the rule. You report when gifts or bequests from a nonresident alien individual or a foreign estate exceed $100,000 during the taxable year. Furthermore, the Form 3520 instructions require you to combine amounts from related donors and estates. Form 3520 is an information return. It reports the receipt; it does not charge tax on it.

Interim and final distributions

Executors often make an interim payment once the grant arrives and a final one after the estate accounts close. For example, £60,000 in December and £50,000 the following March falls in two US years. Neither year may pass the threshold on its own. By contrast, a single £110,000 payment would. So the dollar value of each payment, on the day it arrives, decides whether a form is due.

When the form is due

Form 3520 follows your income tax return. It is due by the 15th day of the fourth month after your year ends. US persons living abroad move to the 15th day of the sixth month. An extension of your return extends the form to the 15th day of the tenth month. In addition, the form is filed separately from your return, not attached to it.

What value do you use for inherited UK assets?

You generally take the market value at the date of death, converted to dollars at that date. That figure becomes your US cost for any later sale. For US UK inheritance reporting, the UK probate valuation is usually your best evidence of it.

The section 1014 rule

Under section 1014 of the Internal Revenue Code, property acquired by bequest, devise or inheritance takes a basis equal to its fair market value at the date of death. Basis is the cost figure you subtract from sale proceeds to find a gain. Therefore, gains built up during your parent's lifetime drop out of the US calculation.

Using the probate value as evidence

HMRC's HS282 helpsheet confirms assets are valued at market value on the day of death. The executor reports those values for inheritance tax using GOV.UK's guidance on valuing an estate. Consequently, the same surveyor's report or share valuation serves both countries. Ask the executor for a copy of the asset schedule early. In our experience, it is far harder to obtain once the estate closes.

Converting to dollars

The basis is a dollar figure, so convert the sterling value at the rate on the date of death. The IRS explains its approach on its page about foreign currency and exchange rates. Note which source and rate you used. Later, when you sell, you convert the proceeds at the rate on the sale date.

The fund trap and its exception

Inherited UK unit trusts and OEICs are usually passive foreign investment companies, or PFICs, for US purposes. A PFIC is a non-US pooled fund that the US taxes under punitive default rules. Section 1291(e) of the Code can cut back the date-of-death uplift on PFIC shares. However, section 1291(e) says that reduction does not apply where the decedent was a nonresident alien. So a British parent's funds usually keep the full uplift.

Which new reports start once you inherit?

Usually, account reports start the year the assets reach you. Inherited UK bank accounts, share portfolios and funds count towards the FBAR and Form 8938 tests. Funds also bring a Form 8621 each year. In US UK inheritance reporting, these annual reports often outlast the one-off form.

The FBAR

The FBAR is the report of foreign bank and financial accounts filed with FinCEN, not the IRS. FinCEN's page on reporting foreign accounts applies it when your combined foreign balances exceed $10,000 at any time in the calendar year. For example, an inheritance paid into your UK current account for a single week still counts. Our pillar on FBAR and FATCA reporting explains the mechanics.

Form 8938 and the estate itself

Form 8938 reports specified foreign financial assets with your return. The Form 8938 instructions say an interest in a foreign estate counts only if you know or have reason to know of it. Moreover, a distribution from the estate means you are treated as knowing. If you cannot value your interest, its value is generally what the estate paid you that year. For taxpayers living abroad, the instructions set thresholds of $200,000 at year end or $300,000 at any time for single filers.

Form 8621 for inherited funds

Once UK funds are registered in your name, each one is a separate PFIC. The IRS page on Form 8621 confirms the form is for direct or indirect PFIC shareholders. Therefore, a portfolio of eight funds can mean eight forms a year. Our PFIC reporting service prepares them alongside your return.

Is income the estate earns after death taxed to you?

It can be. Rent, interest and dividends arising after death belong to the estate, not to your parent. When that income is paid out to you, it may be taxable on your US return. The UK statement R185 is your record of it. Many guides to US UK inheritance reporting skip this step.

The UK side: the administration period

The administration period is the time from the day after death until everything is passed to beneficiaries. GOV.UK's guidance on reporting an estate's income says that from 6 April 2024, estates with total income of £500 or less need not report. Above that, the executor reports all of it, either informally or on a trust and estate return.

The R185

The R185 is HMRC's statement of income from an estate. According to HMRC's page on the R185 (Estate Income), executors use it to advise beneficiaries about income from the estate. Ask for one for every UK tax year in which you received income. Without it, neither return can be finished properly.

The US side: where practice differs

The US rules for distributions from a non-US estate are complex and not settled in plain guidance. Sections 661 and 662 can make a beneficiary taxable on income an estate distributes, as set out in section 662. Advisers differ on how far those rules reach a UK estate. Consequently, the cautious approach reports the R185 income on your US return. You then claim credit for any UK tax the estate paid on it.

Is an inherited UK pension a bequest?

Usually not. A pension death benefit is paid by the scheme under its own rules, not under the will. For US purposes it is therefore treated as income rather than an inheritance, although the point is not free from argument.

The UK tax on death benefits

GOV.UK's page on tax on pension death benefits turns on age. If the owner died before 75, most lump sums are paid without tax, subject to the lump sum and death benefit allowance and a two-year payment rule. If the owner was 75 or over, the provider deducts income tax. Consequently, the UK may deduct nothing at all.

The US view

Income in respect of a decedent is income your parent had a right to that is paid only after death. Section 691 taxes it to whoever acquires that right. A pension death benefit fits that pattern more closely than a bequest. Some advisers argue for other treatments, so this point is contested. The cautious approach reports the payment as income. You then credit any UK tax the provider deducted, which can be nil.

Can you credit UK inheritance tax on your US return?

No. Inheritance tax is charged on the estate, not on your income. The US foreign tax credit is limited to income taxes, so US UK inheritance reporting gives you no relief for it.

Why the credit is unavailable

IRS Publication 514 on the foreign tax credit says that in most cases only income, war profits and excess profits taxes qualify. UK inheritance tax is a tax on the transfer of an estate at death. Therefore, it falls outside the credit. You are not usually liable for it anyway, because the executor pays it before you receive anything.

When inheritance tax still shapes your filings

GOV.UK says inheritance tax is due by the end of the sixth month after death to avoid interest. Executors often sell assets or borrow to pay it. As a result, the timing of the tax payment can delay your distribution into a later US year. Our article on UK inheritance tax for Americans covers who is liable.

Worked example: one estate across three US years

Consider a typical case. Emma is a US citizen living in Boston. Her widowed father dies in Leeds in September of year one. He was a British citizen who never lived in the US. His estate holds a house, a building society account, two UK equity funds and a defined contribution pension.

Year one: death and valuation

The executor values everything at the date of death and pays the inheritance tax. Emma receives nothing this year. Therefore, she has no Form 3520 and no new account reports. However, she asks for the asset schedule and notes the dollar rate for the death date.

Year two: grant, interim payment and the pension

The grant arrives in February. In April, the executor pays Emma £40,000 as an interim distribution. In June, the pension scheme pays her a lump sum directly. Her father died before 75, so the scheme deducts no UK tax. On the cautious approach, Emma reports the pension payment as income on her US return. Because the £40,000 alone sits below the $100,000 test, no Form 3520 is due yet. Nevertheless, if she holds it in a UK account, her FBAR test is met.

Year three: final distribution and the funds

The house sells and the estate closes. In May, Emma receives £95,000 in cash and the two funds re-registered in her name. Together, those pass $100,000, so she files Form 3520 for year three. She also files Form 8621 for each fund and adds them to Form 8938 if her totals cross the threshold. Finally, she reports the R185 income for the estate's last tax year. Her US basis in the funds is the date-of-death value, because her father was a nonresident alien.

What the example shows

One death produced filings in two separate US years and none in the year of death. Furthermore, the largest payment did not create the first filing. The pension and the account balance did. That is why US UK inheritance reporting starts with the executor's timetable rather than the will.

What should you ask the executor for?

Ask for the date-of-death asset schedule, a statement of every payment made to you, an R185 for each tax year, and the final estate accounts. With those, your US UK inheritance reporting can be worked out at any point.

Your document checklist, in order

First, the asset schedule with values at the date of death. Second, a copy of the grant, which GOV.UK explains in its guide to applying for probate. Third, the date and amount of every distribution and transfer to you. Fourth, an R185 for each UK tax year of the administration. Fifth, any pension scheme payment statement. Finally, the closing estate accounts.

Keeping your own record

Keep a running log of each receipt in sterling and dollars, with the rate you used. Additionally, note which account received it and the highest balance that year. That log answers the Form 3520, FBAR and Form 8938 questions together. As a result, US UK inheritance reporting stops being a scramble each April.

How US UK Tax Experts can help

US UK Tax Experts prepares the US return and the related information forms from the executor's papers. For US UK inheritance reporting, we work out which year each payment falls in and whether Form 3520 is due. We also prepare the FBAR and Form 8938 through our FBAR and FATCA service and reflect the R185 income. Where you have your own UK filing, we prepare that from the same file so the two agree. We prepare and file returns; we do not advise on investments or on how to arrange an estate.

Conclusion

Good US UK inheritance reporting depends on the order of events. The bequest itself is not US income, but its receipt can trigger Form 3520 in the year it arrives. Inherited accounts and funds start their own reports. Estate income and pension death benefits can be taxable. UK inheritance tax gives you no credit. Collect the executor's papers early, log each payment in dollars, and file in the year the money reaches you.

Contact us

If you have inherited from a UK estate, email hello@usuktaxexperts.com or use our contact form. Tell us the date of death, what you have received so far and what is still to come. We reply within one working day.