US Exit Tax & Estate Exemption 2026: IRS Guide for UK-Resident American Citizens

Table of Contents

1. What is the US Exit Tax?
2. 2026 Estate Exemption: OBBBA Changed Everything
3. Covered Expatriate Rules (3 Tests)
4. Estate & Gift Tax: Current Framework
5. UK-US Tax Interactions
6. Planning Scenarios
7. Advanced Structuring
8. Tools & Resources
9. FAQ
10. Related Guides

1. What is the US Exit Tax?

According to the IRS, the US exit tax under IRC §877A is a mark-to-market deemed disposition of worldwide assets the day before expatriation. Gains are recognised in USD regardless of asset location. The §877A gain-exclusion amount for 2026 is USD 910,000 (Rev. Proc. 2025-32).

The exposure is triggered when a covered expatriate meets any one of three statutory tests shown below.

2. 2026 Estate Exemption: OBBBA Changed Everything

The anticipated TCJA sunset did not occur. The One Big Beautiful Bill Act (Public Law 119-21), signed 4 July 2025, made the elevated unified estate and gift exemption permanent and raised it to USD 15 million per individual from 1 January 2026 (indexed for inflation thereafter; first adjustment in 2027).

This means:

• 2025 exemption: USD 13.99 million per individual (Rev. Proc. 2024-40).
• 2026 exemption: USD 15 million per individual.
• Married couples: effectively USD 30 million with portability (DSUE).
• GST exemption: matches the basic exclusion amount.
• Top transfer-tax rate: remains 40 per cent.

For UK-resident US citizens who deferred expatriation planning pending the sunset, the landscape has shifted. The elevated exemption reduces the urgency of pre-sunset gifting strategies, but the exit tax itself (IRC §877A) remains fully operative regardless of the exemption level.

3. Covered Expatriate Rules: The Three Tests

According to the IRS:

1. Net-worth test to aggregate worldwide assets > USD 2 million on the day before expatriation. This threshold is fixed in statute and is not inflation-adjusted.
2. Tax-liability test to average annual US net income tax exceeding the inflation-indexed threshold for the five preceding years: USD 206,000 for 2025 expatriations; USD 211,000 for 2026 expatriations (Rev. Proc. 2024-40 §3.37; Rev. Proc. 2025-32 §4.37).
3. Certification test to failure to file Form 8854 attesting to five years of US tax compliance.

Meeting any one test makes the individual a covered expatriate subject to the mark-to-market exit tax.

4. Estate & Gift Tax: Current Framework

The UK-US Estate Tax Treaty (signed 19 October 1978; in force 11 November 1979) provides domicile-based primary taxing rights, tie-breaker rules, and foreign-tax credits to mitigate double taxation on cross-border estates. This treaty survives the UK's 6 April 2025 shift to residence-based IHT.

5. UK-US Tax Interactions

• Dual taxation: the UK taxes worldwide assets of UK residents; the US taxes US citizens on worldwide income until expatriation.
• Double-tax relief: the UK-US Income Tax Treaty (signed 24 July 2001; in force 31 March 2003) provides credits and tie-breaker rules.
• UK IHT reform: from 6 April 2025, UK IHT is residence-based (Long-Term Resident = 10-of-20 tax years). The UK-US Estate Tax Treaty may protect certain US-domiciled individuals from UK IHT even under the new framework.
• Reporting overlap: US pre-expatriation compliance (Form 8854) and UK ongoing reporting must both be satisfied.

6. Planning Scenarios

Scenario 1 to Sub-Threshold Family (UK)

• Net worth USD 1.8 million today.
• Expected business sale pushes assets to USD 3 million next year.
  Action: accelerate expatriation before gain materialises to avoid covered-expatriate status on the net-worth test.

Scenario 2 to High-Net-Worth Entrepreneur (US)

• Private company stake valued at USD 25 million pro-rata.
• Apply valuation discounts (minority, marketability) as appropriate.
• Net worth still likely exceeds USD 2 million; focus shifts to §877A gain-exclusion amount (USD 910,000 for 2026) and deferral elections for illiquid assets.

Scenario 3 to Dual-Jurisdiction Family (UK/US)

• Global estate USD 30 million: 60 per cent UK real estate, 40 per cent US securities.
• With the OBBBA-elevated exemption, the entire estate falls within the USD 30 million married-couple exemption.
  Planning focus: coordinate UK IHT exposure (LTR tail after departure) with US estate-tax position; leverage the UK-US Estate Tax Treaty for credit allocation.

7. Advanced Structuring

• Lifetime gifts: the USD 15 million exemption permits substantial lifetime wealth transfers via outright gifts, SLATs, or dynasty trusts.
• Annual exclusion gifts: USD 19,000 per donee for both 2025 and 2026. Direct tuition and medical payments are unlimited and separate.
• IRC §2801 (covered gifts/bequests): imposes tax at 40 per cent on US citizens, US residents and domestic trusts that receive a covered gift or covered bequest from a covered expatriate. This applies indefinitely (there is no 10-year limit). Final regulations were issued as T.D. 10027 (90 FR 3395, 14 January 2025), effective for covered gifts and bequests received on or after 1 January 2025. The first Form 708 is due 15 July 2027.

8. Tools & Resources

• IRS Form 8854 to expatriation statement
• HMRC to UK non-dom reform guidance
• UK-US Tax Treaty to income tax and estate tax conventions
• IRS Rev. Proc. 2025-32 to 2026 inflation adjustments

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