The inheritance itself is not income on your US return. The IRS treats a bequest from a foreign person as an amount the recipient excludes from gross income. What it asks for is a report: where bequests from a nonresident alien parent or a foreign estate exceed $100,000 in a year, the US recipient files Part IV of Form 3520 (opens the official IRS page in a new tab). Inherited UK accounts can then bring the FBAR and Form 8938 into play as well.
This post is for US citizens and green card holders, in the UK or in the US, whose British parent has died or is likely to leave them money, shares or property. It goes deeper on one corner of our guide to FBAR and FATCA for UK residents: what is taxed and by whom, when Form 3520 is due, when estate and inherited accounts reach the FBAR and Form 8938, and the US basis of inherited UK investments.
Is a UK inheritance taxable income in the US
No. IRS Publication 525 says property received as a gift, bequest or inheritance is generally not included in income. That holds when the parent was British and the estate is administered in the UK. What becomes taxable is the income the inherited property produces after it reaches you, such as interest, dividends or rent.
The UK side is handled by the estate. The GOV.UK inheritance tax pages (opens the official GOV.UK page in a new tab) explain that funds from the estate are used to pay inheritance tax to HMRC, through the executor or administrator, and that beneficiaries do not normally pay tax on what they inherit. The tax is charged at 40% above the available nil-rate bands, starting from £325,000, so what reaches you is normally the net figure after it has been settled.
US estate tax rarely arises. For a parent who was neither a US citizen nor domiciled in the US, the IRS page on estate tax for nonresidents not citizens (opens the official IRS page in a new tab) limits it to US-situated assets, such as US shares or US property, and it is the executor who deals with it. A UK bank account or a house in Kent is outside that charge. Because no US tax falls on the heir, the US interest is in disclosure, and that is where the forms come in.
When does Form 3520 apply to a bequest from a UK parent
Part IV of Form 3520 applies when a US person receives more than $100,000 in the tax year in gifts or bequests from a nonresident alien individual or a foreign estate. A UK estate is a foreign person for this purpose, so a distribution from it counts. Amounts from persons related to the parent or the estate are added together.
The IRS page on gifts from foreign persons (opens the official IRS page in a new tab) sets out the threshold, and the instructions add the detail. Once the total crosses it, each gift or bequest over a much smaller amount is listed separately with its date and a description. Two parents dying in the same year, or a lifetime gift from one followed by a bequest from the other, are counted together because the donors are related. The figure is tested on what you received in the year, so an estate that pays out over two years can produce one report, two reports or none.
The form asks for no tax. It records who gave what and when. A distribution from a foreign trust, including a trust set up under a parent's will that continues after the estate is wound up, is reported in Part III rather than Part IV, with a different and heavier penalty regime. Our page on Form 3520 describes both parts.
- Cash paid out by the executors from the UK estate
- Shares, funds or other investments transferred to you in specie
- A share of the proceeds when the parent's house is sold
- Gifts made by the parent, or by related persons, in the same year
- Payments from a will trust, which belong in Part III instead
When is Form 3520 due and what happens if it is late
For an individual on the calendar year, Form 3520 is due on 15 April of the year after the bequest was received. A US citizen or resident living abroad has until 15 June by attaching a statement, and an extension of the income tax return carries it to 15 October. It is filed separately from Form 1040.
The instructions are explicit that the form is a separate return, mailed to the IRS service centre in Ogden, and that only a complete form with its attachments counts as filed on time. The due date for Form 3520 is not formally tied to the income tax return, though for most individuals it falls on the same day. Sending the form inside the envelope with Form 1040 is a common way for it to go astray.
The penalty for an unreported foreign bequest is proportional, not flat. It is a percentage of the value of the bequest for each month the failure continues, up to a cap, so it grows with the size of the inheritance. It does not apply where the failure was due to reasonable cause and not wilful neglect. The IRS may also decide the income tax treatment of an unreported receipt itself. Late forms are usually submitted under the delinquent international information return procedures (opens the official IRS page in a new tab) with a reasonable cause statement.
When do inherited UK accounts go on the FBAR
Accounts reach the FBAR in two ways. As executor, you may have signature authority over the estate's UK accounts, or be their owner of record. As heir, an account becomes yours once it is retitled or the money lands in your own account. In either case it counts towards the $10,000 aggregate threshold for that year.
The FinCEN filing instructions (opens the official FinCEN page in a new tab) define signature authority as the power to control the disposition of assets in a foreign account by direct communication with the institution, alone or jointly with another person. A US executor who can instruct a UK bank about the estate account fits that description, as the guide notes for attorneys and executors. FinCEN also treats the owner of record or holder of legal title as having a financial interest, even where the account is held for someone else, so an account opened in the executors' own names raises that question. The account title and the bank mandate decide which applies.
On the heir's side, the date of death alone does not move the parent's accounts onto your FBAR. A beneficiary's expectation under a will is not an account. The FBAR question starts when you can operate the account or the funds arrive in an account you hold. Our post on signature authority for UK employees covers the reporting mechanics for accounts you control but do not own.
- Estate accounts you can instruct as executor: reported as signature authority, or as owner of record if titled in your name
- The parent's accounts before probate, frozen by the bank: generally no FBAR line for the heir
- Investment accounts transferred into your name: your financial interest from the transfer date
- Cash paid into your own UK account: raises that account's maximum value for the year
- Accounts operated under a lasting power of attorney before death: signature authority for those years
Does an inheritance from abroad go on Form 8938
It can, in two ways. Once inherited accounts or investments are in your name, they are specified foreign financial assets like any others. Before that, an interest in a foreign estate is itself an asset for Form 8938, but only once you know or have reason to know of it. Receiving a distribution counts as knowing.
The Form 8938 instructions (opens the official IRS page in a new tab) value an interest in a foreign estate at your share of its assets where you know that value. Where you do not, you use the value of the cash and property distributed to you in the year, and with no distributions and no known value the figure is zero. A beneficiary is not treated as owning the estate's own accounts merely by being a beneficiary.
The thresholds are much higher than for the FBAR. For a person living abroad and not filing jointly, Form 8938 is required when specified foreign financial assets exceed $200,000 at year end or $300,000 at any time, and for a single filer living in the US the limit is $50,000 at year end or $75,000 at any time. A large inheritance can cross either in one step. The form goes with the tax return, as our page on Form 8938 explains, and is separate from both the FBAR and Form 3520.
What US basis do inherited UK shares and funds have
Generally, the fair market value at the parent's date of death, the stepped-up basis set out in IRS Publication 551. Gains that built up during the parent's lifetime are not taxed again when you sell. The dollar basis is fixed at the exchange rate on the date of death, so later currency movements can still produce a US gain or loss.
UK funds bring a further layer. Unit trusts, OEICs and most non-US exchange-traded funds are commonly passive foreign investment companies, and from the moment you hold them they need Form 8621 (opens the official IRS page in a new tab) reporting and carry the harsh default tax regime unless an election is made. The PFIC statute normally cuts back the stepped-up basis on inherited fund shares, but it disapplies that cut where the parent was a nonresident alien throughout the holding period. Our post on why a stocks and shares ISA worries the IRS explains why the funds matter, and our PFIC reporting service handles the elections.
Take a US citizen working as a nurse in Leeds whose mother, a British national, dies leaving her a house and a fund portfolio, with her brother as co-executor. She signs on the estate account for two years, so it appears on her FBAR as signature authority. When the portfolio and house proceeds are distributed she files Form 3520 Part IV for that year, lists her new holdings on the FBAR due 15 April, extended automatically to 15 October, and records date-of-death values as her basis.
Our estate and trust planning service and our foreign income and FBAR reporting service work through these steps from the grant of probate to the final distribution, with the FBAR itself filed on FinCEN Form 114. The wider rules on accounts and thresholds are in our guide to FBAR and FATCA for UK residents.
General information, not advice. The right answer depends on your circumstances and the tax year concerned.
