Recent US tax developments mean that families with US connections may need to revisit how gifts, inheritances and trust distributions are structured, particularly where former US citizen or long-term green-card holder has, or may have, US beneficiaries.
The rules can create an unexpected outcome: a US beneficiary may face a significant US tax charge on a gift or inheritance because of the donor’s status, even where the donor ceased to be a US citizen or long term resident many years ago.
While the underlying legislation has existed since 2008, new final regulations and reporting procedures have brought the rules into much sharper practical focus. The introduction of a dedicated US tax return, Form 708, means there is now clearer compliance framework for affected recipients.
The United States taxes its citizens on a worldwide basis. It also applies particular rules when certain individuals give up US citizenship or end long-term US residence.
An individual may be treated as a “covered expatriate” when they renounce US citizenship or surrender a long-term US green card and meet specified tests. These can include a net-worth test, a US tax-liability test and a requirement to certify five years of US tax compliance.
Whether someone is a covered expatriate depends on their individual circumstances at the time of expatriation . Not everyone who gives up US citizenship or long-term US residence will fall within this definition.
The US introduced a further rule in 2008 to address gifts and inheritances from covered expatriates to US recipients.
Under this regime, a US citizen or US estate- and gift-tax resident who receives a gift or inheritance from a covered expatriate can be personally liable for a separate US transfer tax.
Importantly, the tax is imposed on the recipient, rather than on the donor or, in the case of an inheritance, the deceased person’s estate. This means a US beneficiary can have a US tax obligation arising from a historic expatriation decision made by another family member.
The rules are not limited to people who expatriate today. A gift or inheritance received now may be affected where the donor expatriated as far back as 17 June 2008, provided they were a covered expatriate.
Although the rule has technically applied to relevant transfers received since 17 June 2008, its administration was delayed for many years while detailed regulations were awaited.
Final regulations took effect in January 2025, followed by the introduction of Form 708, the dedicated US return used by recipients to report transfers within the regime and determine any tax due.
The rules are therefore now operational in a way that requires affected families to identify issues, gather evidence and meet reporting obligations.
For families dealing with a succession event today, this can create practical challenges, particularly where the donor expatriated many years ago and the recipient does not have access to the relevant historical US tax records.
The tax is calculated at the highest US federal estate-tax rate in force at the time of relevant transfer, currently 40%.
This is a separate tax regime from ordinary USD 19,000 per recipient, and certain important exceptions may apply, including in relation to qualifying charitable or spousal transfers.
Foreign gift or estate taxes paid in respect of the same transfer may also reduce the US liability in certain circumstances. This may include UK inheritance tax where the relevant conditions are met, although the availability and amount of relief will depend on the specific facts.
Consider a UK-resident former US citizen who renounced their US citizenship in 2012 and was a covered expatriate at that time.
In 2026, they leave £1 million to their US-resident daughter. The daughter may have a US reporting obligation and a potential tax liability under the covered expatriate rules, notwithstanding that her parent has lived outside the US for many years.
The precise liability would depend on the circumstances, including the nature and value of the transfer, applicable exclusions and any available foreign tax relief.
The example illustrates why a beneficiary may need to understand the donor’s historic US status before receiving a significant gift or inheritance.
One of the practical difficulties is that the US recipient is responsible for determining whether the donor or deceased was a covered expatriate and whether the transfer is within the regime.
That can be challenging where a family member expatriated many years ago, or where the recipient does not have access to relevant historical US tax information.
The regulations place considerable emphasis on evidence, record-keeping and, where appropriate, protective reporting. A recipient may face a rebuttable presumption in some circumstances if a living donor does not permit access to relevant information.
For families who may be effected, establishing the relevant expatriate status and retaining supporting documentation can therefore be an important part of succession planning.
Trusts require particular care.
Distributions from certain foreign trusts to US beneficiaries can be affected where trust assets can be traced to gifts or inheritances from a covered expatriate, including historic funding after 17 June 2008.
This can make it important to understand the history and source of assets held within a trust, as well as the circumstances in which distributions may ultimately be made to US beneficiaries.
Where a trust has a long history or multiple sources of funding, establishing this information in advance may be considerably easier than reconstructing it when a distribution or succession event occurs.
These rules should be considered well before a planned gift, succession event or expatriation. This is especially relevant for:
An early review can help establish the relevant expatriation status, identify documentation that may be needed and assess the possible interaction between US and UK tax liabilities.
It may also inform the structure and timing of future gifts, inheritances and trust distributions.
Cross-border family wealth planning increasingly requires different advisers to work together.
We can help clients identify where these rules may need to be considered as part of their wider wealth and succession planning working alongside this US and UK tax advisers to understand the potential implications for gifts, inheritances and trust arrangements.
Taking advice early can help families identify potential issues before a significant transfer takes place and ensure that succession planning reflects the family’s wider objectives.
This article is for general information only and is not legal or tax advice. The application of these rules depends on individual circumstances, and specialist US and UK tax advice should be obtained before taking action.
This content has been written for US connected audiences and may not be suitable for those without US financial regulatory requirements.
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