Receiving an Inheritance from England: U.S. Tax and Reporting Requirements

Receiving an inheritance from England can create unexpected U.S. reporting obligations—even when the inheritance itself is not taxable. The key distinction is that an inheritance may be excluded from taxable income while still being reportable to the IRS.

For U.S. citizens, resident aliens, and other U.S. tax residents, the reporting requirements depend on the inheritance amount, the type of property received, whether a foreign trust is involved, and whether the beneficiary retains assets in foreign financial accounts.

Generally, money or property received as a genuine inheritance from a foreign individual or foreign estate is not subject to U.S. federal income tax.

For example, if a U.S. taxpayer receives $300,000 directly from the estate of a deceased relative who lived in England, the $300,000 is ordinarily not reported as taxable income on Form 1040.

However, the taxpayer may still need to report the inheritance on Form 3520. Additional reporting may apply if the beneficiary receives foreign financial accounts, investments, real estate, business interests, or distributions from an English trust.

The distinction is important:

A U.S. person generally must file Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, when the total gifts and inheritances received from foreign individuals or foreign estates exceed $100,000 during the calendar year.

Gifts and inheritances from related foreign persons may need to be combined when applying the $100,000 threshold.

For a direct inheritance from an English estate, the taxpayer generally completes the identifying information and Part IV of Form 3520. The inheritance is disclosed, but it is not normally included in taxable income.

Form 3520 is generally due on the same date as the taxpayer's federal income-tax return, including a valid extension. It is a separate information return and requires careful filing procedures. IRS Form 3520 guidance

The penalty for failing to report a qualifying foreign inheritance can generally equal 5% of the unreported amount for each month the return remains delinquent, up to a maximum of 25%.

A taxpayer who fails to report a $500,000 foreign inheritance could therefore face a potential penalty of as much as $125,000—even though the inheritance itself was not taxable.

These penalties make timely and accurate reporting especially important. Taxpayers should not assume that the absence of income tax means that nothing needs to be filed. IRS guidance on gifts from foreign persons

One of the most important questions is whether the payment comes directly from the executor of the deceased person's estate or from a trust.

A payment from an English executor administering a deceased person's estate will generally be treated as a foreign bequest. A payment from an English trust may be treated as a foreign-trust distribution.

The difference is significant.

A direct foreign inheritance is generally reported in Part IV of Form 3520 and is normally not taxable. A foreign-trust distribution is reported in Part III and may include taxable income, accumulated income, capital gains, or nontaxable principal.

Foreign-trust reporting becomes particularly complicated when the trustee does not provide a complete Foreign Nongrantor Trust Beneficiary Statement. Without adequate documentation, the IRS may apply unfavorable accumulation-distribution rules and interest charges.

Before preparing the return, the taxpayer should determine exactly who issued the payment:

• The executor or administrator of the English estate;
• An individual family member;
• A testamentary trust created under the will; or
• A separate lifetime trust.

The terminology used in English probate documents does not always match U.S. tax terminology. The legal documents must therefore be reviewed rather than relying solely on how the family describes the inheritance.

An inheritance wired directly from an English estate into a U.S. bank account does not ordinarily create an FBAR filing requirement merely because the money originated overseas.

An FBAR may be required when the U.S. taxpayer owns, jointly owns, or has signature authority over an English bank, brokerage, or other reportable foreign financial account.

A U.S. person generally must file FinCEN Form 114, commonly called the FBAR, when the combined maximum value of all foreign financial accounts exceeds $10,000 at any point during the calendar year.

This is an aggregate test. For example, a taxpayer with three English accounts containing maximum values of $4,000 each may have an FBAR filing requirement even though no single account exceeded $10,000.

The FBAR is filed electronically with the Financial Crimes Enforcement Network rather than as part of the federal income-tax return. FinCEN FBAR guidance

Form 8938, Statement of Specified Foreign Financial Assets, may also be required when the value of the taxpayer's foreign financial assets exceeds the applicable threshold.

For an unmarried taxpayer living in the United States, the general reporting threshold is more than $50,000 on the last day of the year or more than $75,000 at any time during the year. Higher thresholds apply to married taxpayers and qualifying taxpayers living outside the United States.

An interest in a foreign estate can potentially constitute a specified foreign financial asset. Foreign bank accounts, brokerage accounts, certain foreign pensions, foreign trust interests, and directly owned foreign securities can also be reportable.

Form 8938 and the FBAR are separate filings. A taxpayer may be required to file both. IRS comparison of Form 8938 and FBAR requirements

Although the inheritance itself is generally excluded from income, earnings generated by the inherited property are normally taxable to the U.S. beneficiary.

Examples include:

• Interest earned in an English bank account;
• Dividends from inherited investments;
• Rent from inherited English real estate;
• Capital gains when inherited assets are sold;
• Business income from an inherited ownership interest; and
• Pension or retirement-account distributions.

U.S. citizens and residents are generally taxed on their worldwide income. Therefore, income earned or retained in England may need to be reported in the United States even if it is also reported in the United Kingdom.

A foreign tax credit may be available when the same income is subject to both U.S. and UK income tax. The availability and amount of the credit depend on the nature of the income, who paid the tax, and applicable treaty provisions.

Inherited property generally receives a U.S. tax basis equal to its fair market value on the decedent's date of death under Internal Revenue Code §1014.

Suppose a taxpayer inherits English real estate worth the equivalent of $600,000 on the date of death and later sells it for $650,000. Before considering selling expenses, currency movements, and other adjustments, the potential U.S. gain would generally be $50,000—not the difference between the sales price and what the deceased person originally paid.

The beneficiary should obtain and retain:

• Date-of-death appraisals;
• Probate valuations;
• Brokerage statements;
• Property records;
• Exchange-rate documentation;
• Records of improvements and selling costs; and
• UK tax filings connected to the property.

All amounts reported on a U.S. tax return must be stated in U.S. dollars. Exchange-rate movements can therefore cause the U.S. gain or loss to differ from the gain calculated in pounds sterling.

The United Kingdom generally imposes inheritance tax at the estate level rather than treating the beneficiary's inheritance as ordinary income.

A U.S. beneficiary should request documentation showing:

• The estate's gross value;
• UK inheritance tax paid;
• Probate and administrative expenses;
• The beneficiary's share;
• The assets distributed; and
• Any post-death income included in the distribution.

UK inheritance tax paid by the estate does not automatically produce a foreign tax credit on the beneficiary's individual U.S. income-tax return. Estate-tax treaty provisions and foreign tax credits require a separate analysis based on the decedent's domicile, the property involved, and the person legally responsible for the tax.

Additional complications can arise when the inheritance includes UK mutual funds, investment funds, pensions, retirement plans, life-insurance products, companies, or partnerships.

Many non-U.S. pooled investments can be classified as passive foreign investment companies, or PFICs, for U.S. tax purposes. PFIC ownership can require Form 8621 and may result in unfavorable taxation.

An inherited UK pension or retirement arrangement also requires a separate analysis. The tax result may depend on:

• The type of pension;
• Whether benefits are paid as a lump sum or periodically;
• The decedent's contributions;
• The beneficiary's rights;
• U.S.–UK treaty provisions; and
• Whether foreign-asset reporting applies.

These assets should not be treated as ordinary cash inheritances without reviewing the underlying plan documents.

A U.S. beneficiary should collect the following before the return is prepared:

• The decedent's name, citizenship, domicile, and date of death;
• The will and any trust documents;
• The English grant of probate or letters of administration;
• The executor's estate accounting;
• The beneficiary distribution statement;
• The date and amount of every payment;
• Date-of-death asset valuations;
• Proof of UK inheritance tax paid;
• Foreign bank and brokerage statements;
• Real-estate appraisals;
• Pension or retirement-plan documents;
• Information about inherited businesses or partnerships; and
• The exchange rate used for each reportable transaction.

Complete documentation helps establish that the payment was a genuine inheritance, identifies the correct Form 3520 reporting category, and supports the tax basis of inherited property.

The preparation cost depends heavily on whether the inheritance is a direct cash bequest or involves a foreign trust, foreign accounts, investments, or property.

Typical professional fee ranges may include:

These amounts are general market estimates rather than fixed fees. The final cost depends on the quality of the records, number of distributions, type of assets, presence of a trust, and whether prior-year corrections are required.

A straightforward return involving one timely reported cash inheritance directly from an English estate might reasonably cost approximately $1,500 to $2,500, including the individual federal return. Foreign-trust cases generally require a separate engagement and substantially more work.

Receiving an inheritance from England usually does not create U.S. income tax at the moment of receipt. Nevertheless, Form 3520, Form 8938, the FBAR, and other international information returns may apply.

The most important steps are to:

• Determine whether the distribution came from an estate or a trust;
• Identify the reporting year based on when the inheritance was received;
• Obtain complete probate and valuation records;
• Determine whether foreign accounts remain open;
• Report income earned after the inheritance;
• Review inherited funds, pensions, and businesses separately; and
• Complete all required filings before their deadlines.

Given the potential penalties, international inheritance reporting should be reviewed before the taxpayer files the annual income-tax return or moves, sells, or reinvests the inherited assets.

This article provides general tax information and is not legal or tax advice for a particular taxpayer. International estate and trust matters should be evaluated using the governing documents and the taxpayer's specific circumstances.