US Estate Tax Non-Resident Alien US Situs Assets: $60k Trap

A non-US domiciled UK investor who dies owning US-situs assets is exposed to US federal estate tax at rates rising to 40% on everything above a $60,000 threshold. US citizens and US domiciliaries currently shelter roughly $15 million each. The gap is not a drafting accident - it is the deliberate design of the situs rules, and it is fixable.

The framework governing US estate tax non-resident alien US situs assets is a situs test, not a residence test. It catches portfolios that never left London, held by people who have never set foot in an IRS office, simply because the shares inside them happen to be issued by American companies. At Jungle Tax we see the same discovery moment repeatedly: a UK family office models inheritance tax to the penny, and finds a 40% American liability sitting underneath the Nasdaq sleeve of the portfolio that nobody priced.

What actually counts as a US-situs asset?

US estate tax for a non-resident alien - meaning a person who is neither a US citizen nor US-domiciled for federal transfer tax purposes - applies only to property with a US situs. Situs is determined by a statutory and regulatory list, and the results are counter-intuitive to anyone reasoning from first principles.

The most important rule is this: shares in a US corporation are US-situs property regardless of where the certificates are held, where the shareholder lives, where the broker is, or which currency the account is denominated in. A UK resident holding Apple stock through a Jersey platform, inside a UK SIPP wrapper, in a sterling-denominated account, still owns US-situs property for estate tax purposes.

Two entries deserve emphasis. First, US-domiciled ETFs - the default building block of almost every low-cost global portfolio built on a US platform - are squarely US-situs. Second, the treatment of US partnership and LLC interests has never been definitively resolved by statute or regulation. Sophisticated planning does not rely on an unsettled position when the downside is 40%.

Why is the exemption only $60,000 when a US citizen gets $15 million?

The mechanism is a credit, not an exemption. A US citizen or domiciliary receives a unified credit that shelters a basic exclusion amount currently in the region of $15 million per person. A non-resident alien receives a fixed statutory unified credit of $13,000, which - run backwards through the graduated estate tax rate table - shelters exactly $60,000 of taxable US-situs estate.

That $13,000 figure is not indexed. It has stood while the citizen exclusion has risen through several multiples. The rate table above the threshold is graduated from 18% and reaches the top 40% band relatively quickly, so for any meaningful portfolio the effective marginal rate is 40%.

Three consequences follow that clients rarely anticipate:

• The filing trigger is the threshold, not the tax. A US estate tax return on Form 706-NA is required where US-situs assets exceed $60,000 at death, even if treaty relief ultimately reduces the tax to nil.
• There is no automatic spousal exemption. The unlimited marital deduction is unavailable where the surviving spouse is not a US citizen, unless the property passes to a qualified domestic trust.
• Custodians freeze first and ask later. US brokers and transfer agents typically will not release assets to a foreign executor without an IRS transfer certificate, which can take many months to obtain. Liquidity, not just tax, is the immediate problem.

The IRS sets out the framework in its estate tax guidance, and the return itself is described at About Form 706-NA.

How does the US-UK estate and gift tax treaty change the answer?

The 1978 US-UK Convention on estates, inheritances and gifts is the single most valuable and most under-used instrument in this area. It is a domicile-based treaty, and it reallocates taxing rights by asset class.

What does the treaty actually protect?

In outline, and subject to the treaty's own tie-breaker rules on fiscal domicile:

• Real property remains taxable by the country in which it is situated. A UK-domiciled individual's Manhattan apartment stays inside the US estate tax net. The treaty does not rescue directly held US real estate.
• Business property of a permanent establishment likewise remains taxable where the establishment sits.
• All other property - critically, including shares in US corporations - is generally taxable only in the country of the deceased's treaty domicile. For a genuinely UK-domiciled decedent, that means the US portfolio can fall outside US estate tax altogether.

This is transformative. A UK-domiciled investor with $12 million of US equities and no US real estate may, correctly advised, face no US estate tax at all - while an identically situated investor who never claims the treaty faces a liability approaching $4.8 million.

The price of the relief is disclosure. Claiming treaty protection on Form 706-NA generally requires disclosing the worldwide estate to the IRS so that the allocation can be verified. Clients who value privacy above all else need to understand that trade-off before death, not after.

The domicile mismatch nobody has repriced since April 2025

Here is the point most UK advisers have not yet absorbed. From 6 April 2025 the UK abandoned domicile as the connecting factor for inheritance tax and replaced it with a long-term residence test, under which worldwide assets come into the UK IHT net once an individual has been UK resident for ten of the previous twenty tax years.

The US-UK estate tax treaty, however, still tests domicile under its own definitions. The result is a growing population of individuals who are outside UK IHT on non-UK assets but who may or may not be treaty-domiciled in the UK - and treaty domicile is what unlocks protection for their US shares. Conversely, an individual now caught by UK long-term residence may find their US-situs assets protected by the treaty while their global estate is fully within HMRC's reach.

Mapping the two tests against each other is now a core part of cross-border tax planning for anyone with a foot in both systems. Assumptions carried over from the pre-2025 remittance basis world are no longer safe.

US estate tax and UK inheritance tax compared

HMRC's own technical position sits in the Inheritance Tax Manual, with the consumer-facing summary at gov.uk/inheritance-tax.

Which structures actually defuse the exposure?

1. Replace US-domiciled funds with non-US funds

For an investor with no US tax connection, the cleanest fix is also the simplest: hold global and US equity exposure through Irish-domiciled UCITS funds rather than US-domiciled ETFs. The underlying shares do not look through, so the situs problem disappears at a stroke, and the fund's own treaty position typically reduces US dividend withholding to 15% rather than the 30% statutory rate.

The critical caveat: this solution reverses entirely if any family member is a US person. Non-US funds are passive foreign investment companies in American hands, with punitive taxation and Form 8621 reporting. A mixed-nationality household needs two portfolios, not one - a point we cover in our work with high-net-worth families.

2. The non-US corporate blocker

Shares in a non-US company are not US-situs property, so interposing a non-US holding company between the investor and the US assets removes the estate tax exposure. This is the traditional answer for US real estate.

It is not free. A foreign corporation owning US real property faces corporate-level US tax on rental income and on gain, loses the preferential individual capital gains rates and the death-time basis step-up, and is exposed to branch profits tax - though the US-UK income tax treaty can reduce or eliminate that charge for a qualifying UK company. Personal use of a company-owned property also raises UK benefit-in-kind and shadow director issues. The structure must be economically real, properly capitalised and correctly administered, or the IRS will treat it as a nominee.

3. Trust and two-tier structures

The durable answer for larger estates is a non-US trust owning a non-US company which in turn owns the US assets. Settled correctly and at the right time, the structure removes the assets from the settlor's estate, blocks situs, and survives into the next generation without a fresh 40% charge at each death.

Timing is everything. A trust settled after a beneficiary becomes a US person, or funded with assets the settlor has already contracted to sell, creates more problems than it solves. Our trusts and estate planning work almost always begins with sequencing rather than drafting.

4. Debt, insurance and liquidity

Non-recourse debt secured on US real property reduces the value of the US-situs asset directly. Recourse debt is deductible only on a pro-rata basis by reference to the ratio of US-situs assets to the worldwide estate - which again forces worldwide disclosure. Where exposure cannot be eliminated, life insurance on the life of a non-resident alien is not itself US-situs property, making it an efficient way to fund a liability that cannot be planned away.

5. Lifetime gifting of intangibles

US gift tax applies to non-domiciliaries only on transfers of US real property and tangible personal property located in the US. Intangibles - including shares in US corporations - are generally outside the US gift tax net for a non-domiciliary. A lifetime gift of US shares can therefore remove situs exposure at no US gift tax cost, subject to UK inheritance tax survivorship rules and to capital gains consequences on both sides.

What happens if the family does nothing?

The failure pattern is consistent. Death occurs. The US custodian discovers a foreign address on file and freezes the account. The executor is told that an IRS transfer certificate is required. The certificate requires a filed Form 706-NA. The return is due nine months after death, with an extension available for filing but not for payment. Interest and penalties accrue on unpaid tax while the only asset that could pay it is the frozen account.

Meanwhile the UK executors are working to their own six-month deadline for IHT, and cannot finalise the double tax credit until the US position is settled. Estates in this position routinely take two to three years to administer, and the professional cost is a multiple of what proactive structuring would have cost.

What about a surviving spouse who is not a US citizen?

The unlimited marital deduction that US couples rely on is denied where the surviving spouse is not a US citizen, on the theory that the assets could leave the US tax net untaxed. The statutory workaround is a qualified domestic trust, which defers the estate tax until distributions of principal are made to the surviving spouse or until the trust terminates, and which must have a US trustee with withholding responsibility.

For a UK-domiciled couple protected by the treaty on their portfolio assets, a qualified domestic trust is usually relevant only to US real estate. But where the treaty is unavailable - for example where treaty domicile is genuinely contested - it becomes the difference between deferral and an immediate 40% charge. Lifetime gifts to a non-citizen spouse are also restricted to an annual indexed amount rather than being unlimited.

A worked illustration

Consider a UK-resident, UK-domiciled founder with a $9 million US equity portfolio held on a US platform, a $3 million Miami apartment held personally, and no US corporate structure.

• Without planning or a treaty claim: $12 million of US-situs assets, less the $60,000 threshold, taxed at rates reaching 40% - an exposure in the region of $4.7 million.
• With a properly filed treaty claim: the $9 million portfolio falls outside US estate tax as property covered by the treaty's residual article; the $3 million apartment remains taxable in the US.
• With structuring: the portfolio is migrated to non-US funds, and the apartment is held through an appropriately capitalised non-US company beneath a pre-existing non-US trust, with the income tax consequences modelled and accepted. US estate exposure approaches nil.

The three outcomes differ by several million dollars and rest entirely on decisions made while the client is alive and well. That is the whole point.

What should a UK investor do next?

Start with an inventory. Every account, every fund, every ticker, mapped against situs. Most families discover exposure they did not know they had - inherited American shares, a legacy US brokerage account, art on long loan to a US institution, a dormant LLC from an old venture. Then test treaty domicile honestly, model the UK long-term residence position alongside it, and only then choose a structure. Our private client tax services team runs this exercise as a fixed-scope engagement, and our technical guides cover the adjacent issues in more depth.

The $60,000 threshold is not a loophole to be argued with. It is a design feature of a system that was never intended to accommodate globally invested families, and it will not be legislated away. What can be changed is where the assets sit, what wrapper holds them, and whether the treaty position is documented before it is needed rather than reconstructed by executors under deadline.

If you hold US shares, US real estate or any other US-situs asset and you are not certain how the $60,000 threshold and the US-UK estate tax treaty apply to you, contact our cross-border team for a confidential consultation. We will map your situs exposure, test your treaty position and set out the structuring options - discreetly, and before it becomes an executor's problem.