# Inheritance tax for US resident living in UK



## KRM2015 (Jan 21, 2015)

Hi

I have a question regarding inheritance tax. My wife's parents are UK citizens. My wife is a US citizen and full time UK resident. When the day comes, what (if any) are the US tax implications of any money that she may inherit from her parents?

Thanks in advance

Karl


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## Bevdeforges (Nov 16, 2007)

The US normally doesn't tax its citizens/taxpayers on the receipt of an inheritance. The US inheritance tax is on the estate itself and not on the heirs. Now, if she sets up a foreign bank account to hold the money she inherits, she'll have to report the account(s) on a regular FBAR filing. And any interest or other income generated by the funds will be reportable (and potentially taxable) on her US tax returns.)
Cheers,
Bev


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## KRM2015 (Jan 21, 2015)

Thank you!


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## BBCWatcher (Dec 28, 2012)

She'll also likely have to file IRS Form 3520 unless the inheritance is relatively small. She shouldn't forget to file that form (if required). Penalties are steep (5% to 25% of the inheritance) if she doesn't. Depending on the nature of the inheritance, she may need to continue filing that form annually in subsequent years.

She may also have to file IRS Form 8938 ("FATCA") with her U.S. tax return.

IRS Form 3520, IRS Form 8938, and FinCEN Form 114 ("FBAR") are only financial reports. There is no tax due with any of them.

There are U.S. tax considerations in how she should handle inherited assets going forward, but she'd have time to consider her options when the time comes. She shouldn't take any particular actions unless and until she understands the U.S. tax consequences and the other considerations (e.g. transaction costs in selling or converting inherited assets). If the size of her estate grows beyond about $5.5 million (as a consequence of the inheritance she receives, or otherwise), she'll want to spend some time understanding the U.S. inheritance tax and how it works.

There may still be foreign inheritance tax due to some other country (or countries).

I am assuming in the above answers the the deceased person providing the inheritance is not a U.S. citizen, not a U.S. resident, and not a "covered expatriate" (a person who renounced U.S. citizenship and was subject to the U.S. Expatriation Tax). If any of those conditions apply, the answers change significantly. I'm also assuming nothing "exotic," for example that she inherits assets in an embargoed country or the proceeds of illegal activities.


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## KRM2015 (Jan 21, 2015)

OK thanks, looks like it's a time to tax professional advice as and when the time comes


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## BBCWatcher (Dec 28, 2012)

Well, maybe. They'd be assets just like any others she may already hold, and the income generated from those assets is reportable as income on her U.S. tax return. (Whether that income generates U.S. tax or not is another question.) If she already understands U.S. tax issues related to various assets -- real estate, stocks, bonds, mutual funds, etc. -- then she'll just have more of them (and more types of them) at some point, that's all.

For example, if she already has or inherits non-U.S. mutual funds, those are likely assets the IRS considers Passive Foreign Investment Companies (PFICs). PFICs require some special tax reporting and separate forms, generally an annual fair market value assessment and a calculation of the gains (something called QEF elections), then possible tax owed on those "paper" gains for the year (but also with a reset in the cost basis). U.S. citizens tend to steer away from PFICs for that reason, at least for tax simplicity, but they would balance that against the transaction costs associated with converting such assets to something else.

I suppose her potential benefactor(s) could adjust their holdings to remove the PFICs (and foreign trusts, another source of tax complexity) before they're inherited, but that's going a bit overboard I'd say. And if she stands to inherit, say, a house, a car, a couple ordinary bank accounts, and a savings bond found in a sock drawer, that's already simple enough.


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