A United States citizen dies in the United Kingdom having spent a significant number of years living and working in the UK. To which country or countries will estate taxes be payable?
Fortunately, in the case of the US and the UK there is an estate tax treaty that has mechanisms to prevent double taxation.
According to UHY partner Christopher Byrne, the US / UK Estate Tax Treaty uses domicile primarily as the bases of estate taxation. The exception is real property and business property of a permanent establishment. Those are taxed based on location.
Under the Treaty the decedent will be deemed to be a UK domiciliary if he 1. was domiciled in the UK within 3 years of the date of death or 2. was resident in the UK in not less than 17 of the 20 income tax years which end with the income tax year in which he died. If domiciled in the UK, the UK will have primary jurisdiction to tax his worldwide estate. If however, he lived in the UK for less than 7 of the last 10 income years, then due to his US citizenship, he will be a US domiciliary. The US would then have primary estate tax jurisdiction and the UK would only be able to tax his real estate and certain business property located in the UK.
If domiciled in both countries, the Treaty contains a series of tie breakers, to determine which country gets primary jurisdiction.
As a citizen of the US, he will need to file a US estate tax return. Assuming that he is not treated as a US domiciliary in addition to being a UK domiciliary, the estate will take credit on its US return for the UK estate taxes paid. If the US tax on those assets is greater than the allowable credit, the difference is paid with the US return.
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