Why UK Inheritance Trips Up US Expats
The story plays out the same way most years. A US citizen has been living in the UK for a decade or more. A British parent or grandparent passes away and leaves them a share of a Yorkshire family home, a Lloyds investment portfolio, or simply £180,000 of cash from the sale of the deceased's flat in Edinburgh. UK probate handles the inheritance smoothly on the British side. The Americans assume that because the inheritance is not taxable income in the US, there is nothing to report.
Six months later, they discover Form 3520, the $10,000 minimum penalty, and the realization that this report was missed for the year of the inheritance. This guide walks through how the IRS Streamlined Program can fix this exact situation, how the US-UK Estate and Gift Tax Treaty 1978 sits alongside the reporting obligation, and the specific Form 3520 mechanics that catch UK-based Americans most often. For TaxYork's broader Streamlined service, see our Streamlined Foreign Offshore Procedures service.
What Is the IRS Streamlined Program
The IRS Streamlined Program is the umbrella term for the Streamlined Filing Compliance Procedures, launched by the IRS in 2012 and expanded substantially in 2014. The program has two branches. The Streamlined Foreign Offshore Procedures (SFOP) apply to taxpayers who meet a 330-day foreign residency test for at least one of the three most recent tax years for which the filing deadline has passed — virtually every American living in the UK qualifies. The Streamlined Domestic Offshore Procedures (SDOP) apply to taxpayers still in the US.
For a UK-based American with a missed Form 3520 for a UK inheritance, the SFOP route combines the Form 3520 catch-up with the wider Streamlined submission, along with three amended or original Form 1040 returns and six FBARs filed through the FinCEN BSA E-Filing System. The 5 percent miscellaneous offshore penalty that applies to SDOP filers is waived entirely under SFOP. The IRS Streamlined Procedures reference sits at https://www.irs.gov/individuals/international-taxpayers/streamlined-filing-compliance-procedures.
The consequences of failing to address a missed Form 3520 outside the Streamlined route are significant. The penalty for failing to file Form 3520 for a foreign gift or inheritance is the greater of $10,000 or 35 percent of the unreported amount, and the statute of limitations on the underlying return stays open indefinitely until the Form 3520 is filed correctly. For an inheritance of £250,000 (roughly $315,000), the 35 percent penalty calculates to over $110,000 — a number that focuses minds quickly.
Who Qualifies — Americans in the UK Explained
The SFOP eligibility tests apply just as much to a missed Form 3520 catch-up as to a missed Form 1040 or FBAR catch-up. The 330-day foreign residency test must be met in at least one of the three most recent filing-deadline-passed tax years. The conduct must be certifiable as non-willful on Form 14653. The IRS must not have already contacted the taxpayer about the missing filings.
Common misconceptions worth flattening at the outset. The US-UK Estate and Gift Tax Treaty 1978 does not eliminate the Form 3520 filing obligation — it addresses double taxation on the underlying transfer, but the US-side information return continues. A foreign inheritance is generally not US-taxable income, but the reporting obligation applies regardless of whether tax is owed. UK Inheritance Tax paid by the deceased's estate does not eliminate the US-side reporting either, although it interacts with US estate tax if the deceased was a US person.
Americans married to UK nationals face a slightly different angle. A non-citizen UK spouse is not a US filer (unless a Green Card holder) and is not subject to Form 3520 reporting on their own inheritances. The US-citizen spouse is, but only for inheritances or gifts received personally, rather than for joint ownership transfers structured under UK law. The IRS Form 3520 instructions are available at https://www.irs.gov/forms-pubs/about-form-3520.
The Fundamental Structure of Form 3520 Rules for UK Inheritance
Subtopic A: When Form 3520 Applies to a UK Inheritance
Form 3520 (Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts) applies to a US person who receives more than $100,000 in aggregate during a calendar year from one or more non-US individuals or non-US estates. The threshold is calculated on an aggregate basis across all qualifying transfers from non-US super transfer years, not per transfer. A £80,000 cash inheritance plus a £25,000 gift from a separate UK relative in the same year crosses the $100,000 threshold once converted to USD at the relevant exchange rate.
For a UK inheritance specifically, the trigger is the date the US person becomes legally entitled to receive the inheritance, which under UK probate typically aligns with the issue of the grant of probate or letters of administration. A delayed distribution from a UK estate does not necessarily push the reporting year forward — entitlement, not receipt, matters.
Inheritances from foreign trusts (rather than from individuals or estates) are subject to different rules under separate Form 3520 categories. UK Discretionary Trust distributions, UK Bare Trust distributions, and UK Interest in Possession Trust distributions all require Form 3520 reporting regardless of the $100,000 threshold, and the Form 3520-A counterpart may also apply. The HMRC trust framework is available at https://www.gov.uk/trusts-taxes.
Subtopic B: What Form 3520 Reports
Form 3520 reports four categories of transactions. Part I covers transactions with foreign trusts. Part II covers US owners of foreign trusts. Part III covers distributions from foreign trusts to US beneficiaries. Part IV covers the receipt of foreign gifts and bequests totaling more than $100,000 in aggregate. A UK inheritance from a UK individual or UK estate sits in Part IV.
The information reported includes the date of each gift or bequest received, the description (cash, property, investments), the fair market value in USD at the date of receipt, the name and address of the non-US donor or decedent, and the donor's or decedent's relationship to the recipient. No US income tax is computed on Form 3520 for a Part IV foreign gift or bequest — the form is an information return only.
For inherited UK property specifically, the recipient gets a stepped-up basis under IRC Section 1014 to the fair market value at the date of death. This is critical when the recipient later sells the property — capital gain is computed against the stepped-up basis rather than the original cost basis. Documentation of the date-of-death valuation matters significantly here, typically through a UK chartered surveyor's valuation prepared for UK probate purposes.
Subtopic C: UK-Specific Reporting Patterns
Three patterns recur in TaxYork engagements. First, cash inheritance from a deceased UK parent paid in a single distribution after UK probate — straightforward Form 3520, Part IV, with the distribution date, USD value, and decedent details. Second, inherited UK property held in joint or sole name after UK probate — Form 3520, Part IV, reporting the property at the date-of-death USD value, with stepped-up basis under IRC Section 1014 documented for any future disposal. Third, ongoing distributions from a UK trust established by a deceased parent — Form 3520 Part III for each year a distribution is received, plus Form 3520-A if the US recipient is treated as owner of the trust under IRC Sections 671-679.
The Form 3520 is filed with the IRS separately from Form 1040, by the same deadline (15 April, with applicable extensions for US persons abroad). The IRS treats the form as part of the annual return cycle, even though it is filed with a different IRS service center. The IRS instructions for Form 3520 are available at https://www.irs.gov/instructions/i3520.
Step-by-Step: How a UK Expat Handles a Missed Form 3520 Through the IRS Streamlined Program
Step 1 — Confirm the inheritance details and aggregate value. Document the date of legal entitlement under UK probate, the type of property received (cash, real estate, investments, trust interest), the fair market value in USD at the date of receipt or date of death where relevant, and the donor or decedent's name, address, and relationship.
Step 2 — Identify all transfers from non-US sources in the same calendar year. A UK inheritance combined with a separate UK gift in the same year aggregates against the $100,000 threshold. Lifetime gifts from UK relatives received in the same calendar year may push a sub-threshold inheritance over the reporting line.
Step 3 — Confirm SFOP eligibility for the wider Streamlined submission. Check the 330-day foreign residency test, draft the non-willfulness narrative on Form 14653, confirm no prior IRS contact—the IRS Streamlined eligibility reference available is available at https://www.irs.gov/individuals/international-taxpayers/streamlined-filing-compliance-procedures.
Step 4 — Prepare the missed Form 3520 for the year of the inheritance. Complete Part IV for foreign gifts and bequests with full transfer details, USD valuations, and donor or decedent identification. Attach supporting documents: UK probate grant, UK valuation report for property, bank statements showing cash distribution.
Step 5 — Build the wider SFOP submission. Three Form 1040 returns covering the most recent three filing-deadline-passed years, Form 1116 for foreign tax credit on UK tax already paid, Form 8938 where asset thresholds are crossed, six FBARs through the BSA E-Filing System, and the Form 14653 non-willfulness narrative covering the missed Form 3520 alongside any other missed filings.
Step 6 — Submit Form 3520 inside the SFOP package. The Streamlined submission includes the late Form 3520 for the inheritance year as part of the coordinated catch-up package. SFOP processing waives the offshore penalty on Form 3520 alongside the FBAR and Form 8938 penalty waivers, provided the non-willfulness certification is properly drafted and accepted.
Step 7 — Document the stepped-up basis for any inherited property. Keep the UK date-of-death valuation, the UK probate documentation, and the USD conversion at the date of death on file for any future disposal. The stepped-up basis under IRC Section 1014 reduces the eventual US capital gains exposure on a future sale, and the IRS expects clean documentation when the disposal is later reported.
The Streamlined Filing Compliance Procedures — What UK Expats Need to Know
The Streamlined Foreign Offshore Procedures handle missed Form 3520 filings, as well as missed Form 1040, FBAR, and Form 8938 filings, when the missed Form 3520 falls within the three-year SFOP window. For a UK inheritance received in 2022, 2023, or 2024, the corresponding Form 3520 fits inside an SFOP submission made in 2026. For an inheritance received in 2019 or earlier, the late Form 3520 falls outside the three-year SFOP window and requires a separate reasonable cause submission to the IRS — a different, less protected route.
The non-willfulness certification on Form 14653 must specifically address the missed Form 3520, along with any other missed filings. The narrative should cover when the inheritance was received, who the UK donor or decedent was, what the recipient understood at the time about US reporting obligations, and what changed in their understanding to prompt the catch-up. Generic statements rarely satisfy the IRS examiner reviewing the submission.
For TaxYork's dedicated SFOP service, see our Streamlined Foreign Offshore Procedures service. The full IRS Streamlined Procedures program reference is available at https://www.irs.gov/compliance/streamlined-filing-compliance-procedures.
Real UK Expat Scenario — IRS Streamlined Program for UK Inheritance
Case Study: A US-UK Dual Citizen in Yorkshire Inherits Half of a Family Home
A 39-year-old US-UK dual citizen had been living in York since 2017, working as a UK-based architect through PAYE employment. Her US-citizen father had died unexpectedly in early 2023, leaving his estate equally to her and her US-citizen brother. The estate included his Yorkshire family home in Harrogate (valued at £580,000 at the date of death), a Barclays cash deposit of £148,000, a Hargreaves Lansdown investment portfolio worth £92,000, and a small NS&I Premium Bonds holding worth £30,000.
She received her half share through UK probate, which closed in late 2023. Her inheritance comprised half of each asset: £290,000 of the family home (which she retained jointly with her brother), £74,000 of cash, £46,000 of the investment portfolio, and £15,000 of Premium Bond. The total USD value at the date of receipt is approximately $545,000.
She had been filing US tax returns through a Manhattan-based CPA since her arrival in the UK, but the CPA had not flagged Form 3520 when she mentioned the inheritance in passing during her 2023 return preparation. The CPA assumed the inheritance was not reportable because it was not taxable income. Her 2023 Form 1040 went in without Form 3520. The Form 3520 deadline of 15 October 2024 (with the expat extension) passed without filing.
She contacted TaxYork in early 2026 after reading about Form 3520 on a US expat forum. The diagnostic confirmed the missed Form 3520, SFOP eligibility for the wider submission (the 2023 inheritance year fell inside the three-year SFOP window), and clear non-willful conduct given the misadvice from her prior preparer.
The TaxYork SFOP package covered three Form 1040 amendments for 2022, 2023, and 2024, the missed Form 3520 for 2023 reporting the full inheritance, six FBARs through the BSA system, Form 8938 for 2023 and 2024 (her assets crossed the $200,000 threshold once the inheritance was received), and Form 14653 with a detailed narrative covering the misadvice from her prior preparer and the prompt action after she discovered the issue.
The IRS accepted the submission seven months later. No Form 3520 penalty — the $10,000 minimum penalty was waived under the SFOP framework. No FBAR or Form 8938 penalties. The stepped-up basis for the Harrogate property was documented at £290,000 (her half-share at the date of death) for future disposal purposes. Net US federal tax owed across the three filing years totaled approximately $4,800, after applying the foreign tax credit to her UK PAYE tax paid, plus interest of around $410. Total cost to settle: small US tax plus TaxYork's professional fees of £6,200.
The case shows the pattern most US expats with UK inheritances follow — the inheritance itself is generally not taxable. Still, the missed Form 3520 creates the real exposure, and the IRS Streamlined Program is almost always the cleanest fix.
Penalties for Non-Compliance — What UK Americans Risk
The penalty exposure for missed Form 3520 filings on UK inheritances stacks alongside the wider FBAR and Form 8938 exposure. Form 3520 penalties run at the greater of $10,000 or 35 percent of the unreported amount for foreign gifts and bequests. For an unreported £250,000 inheritance (roughly $315,000), the 35 percent penalty calculates to over $110,000. FBAR non-willful penalties run up to $16,536 per form per year for 2025 assessments. Form 8938 penalties are $10,000 per form, plus $10,000 per 30 days after IRS notice, capped at $50,000. Form 1040 failure-to-file penalties run at 5 percent per month up to 25 percent of the unpaid tax.
The IRS Streamlined Program waives all of these offshore penalties for taxpayers who qualify, including the Form 3520 penalty when the missed filing year sits inside the three-year SFOP window. Underlying US federal tax remains owed, but for most UK inheritance scenarios, the inheritance itself is not US-taxable income, so the net tax owed is typically near zero. For deeper coverage of penalty exposure, see our guide to FBAR filing for Americans in the UK. The IRS penalty relief reference sits at https://www.irs.gov/payments/penalty-relief.
Common Mistakes Americans in the UK Make With the IRS Streamlined Program for Inheritance
Assuming UK inheritance is not US-reportable because it is not US-taxable income. The two concepts are different. A UK inheritance is generally not taxable income in the US, but the Form 3520 information return obligation applies regardless once the $100,000 threshold is crossed. The penalty for missing the report is severe, even though no US tax is owed on the underlying transfer.
Filing Form 3520 late as a quiet disclosure rather than through SFOP. Filing a late Form 3520 through normal channels without invoking the Streamlined program constitutes a disclosure and does not qualify for the Streamlined penalty waiver. The IRS has stated explicitly that quiet disclosures may attract enforcement attention. Use SFOP or file under the reasonable cause framework with specialist advice.
Forgetting the stepped-up basis documentation for inherited property. Inherited UK property gets a stepped-up basis under IRC Section 1014 to the fair market value at the date of death. Without proper documentation of the UK date-of-death valuation, the future US capital gain on disposal gets computed against the deceased's original cost basis rather than the stepped-up value, materially inflating the eventual US tax bill.
Aggregating wrong on the $100,000 threshold. The $100,000 Form 3520 threshold is calculated on an aggregate basis across all qualifying transfers from non-US sources during a single calendar year, not per transfer. A US person receiving £60,000 from a UK aunt and £55,000 from a UK uncle in the same year exceeds the threshold, even though no single transfer alone exceeds it.
Missing Form 3520 reporting on distributions from UK trusts. UK Discretionary Trust distributions, UK Bare Trust distributions, and UK Interest in Possession Trust distributions all require Form 3520 reporting regardless of the $100,000 threshold. UK family settlements that distribute to US beneficiaries trigger annual reporting obligations on each distribution. The HMRC trust framework is available at https://www.gov.uk/trusts-taxes.
Acting after the IRS Form 3520 letter arrives. SFOP eligibility closes once the IRS contacts the taxpayer about the missing filing. If the IRS has issued a Notice CP15 or Notice CP215 for a late Form 3520, the Streamlined route is closed for that filing year, and the response shifts to reasonable cause submission under separate procedures.
The US-UK Tax Treaty and UK Inheritance
The US-UK Estate and Gift Tax Treaty 1978 governs the underlying tax treatment of UK inheritances and gifts on the US side, separate from the Form 3520 information return obligation. Article 5 contains the domicile tiebreaker rules to apply when the deceased had connections to both countries. Article 7 addresses property situs rules for cross-border assets. Article 8 provides credit relief where both UK Inheritance Tax and US estate tax apply to the same transfer.
In practice, the treaty rarely creates US estate tax exposure for a UK inheritance received by a US person from a UK relative who was UK-domiciled at death and never had US citizenship or Green Card status. The deceased's UK estate pays UK Inheritance Tax above the nil-rate band, and the UK-domiciled non-US deceased does not trigger US estate tax. The Form 3520 information return obligation continues regardless.
The US-UK Income Tax Convention 1975 (as amended) covers foreign tax credit relief under Article 24 on the US recipient's ongoing income from inherited UK assets — UK dividend income, UK rental income from inherited property, UK interest from inherited cash. The full US-UK Tax Treaty text sits on the Treasury website at https://home.treasury.gov/policy-issues/tax-policy/international-tax.
How TaxYork Helps Americans in the UK With Missed Form 3520 and the IRS Streamlined Program
TaxYork specializes exclusively in US expat tax for Americans living in the UK. Our team includes IRS Enrolled Agents and US-qualified preparers with deep experience handling UK inheritance scenarios — UK probate documentation, UK date-of-death valuations for inherited property, UK trust distribution patterns, and the Form 3520 information return mechanics that catch most general preparers off guard. The same team handles every part of the SFOP submission,, so the Form 3520 narrative aligns with the Form 14653 non-willfulness certification and the wider three-year Form 1040 catch-up.
A typical UK inheritance Streamlined engagement runs three phases. Phase one is the diagnostic — confirming the inheritance year sits inside the three-year SFOP window, gathering UK probate documentation and date-of-death valuations, identifying any companion lifetime gifts that affect the $100,000 aggregate threshold, and assessing the non-willfulness position. Phase two is the submission preparation — three Form 1040 returns with Form 1116 foreign tax credit, the missed Form 3520 for the inheritance year, six FBARs through the BSA system, Form 8938 where the inheritance pushes the taxpayer above the asset threshold, and Form 14653 covering the inheritance and any other missed filings. Phase three is the post-submission monitoring — IRS correspondence handling, processing center follow-up where needed, and documentation of the stepped-up basis under IRC Section 1014 for any inherited property.
For broader Streamlined work, see our Streamlined Foreign Offshore Procedures service. Contact TaxYork today at info@taxyork.com or visit https://www.taxyork.com/ — we help Americans in the UK get fully IRS-compliant on missed inheritance reporting, often with all Form 3520 and offshore penalties eliminated through the Streamlined Procedures.
Conclusion
Three points to take away. First, the IRS Streamlined Program handles missed Form 3520 filings for UK inheritances cleanly when the inheritance year falls within the three-year SFOP window, with the Form 3520 penalty waived alongside the FBAR and Form 8938 penalty waivers. Second, UK inheritance is generally not US taxable income. Still, the Form 3520 information return obligation applies once aggregate transfers from non-US sources cross $100,000 in a calendar year, and the 35 percent penalty for missed reporting often exceeds any underlying tax that would have been due. Third, the stepped-up basis under IRC Section 1014 for inherited UK property is one of the most valuable documentation points in the process, so date-of-death valuations and UK probate paperwork need to be preserved for any future disposal. Talk to us at info@taxyork.com if you are an American living in the UK who has received a UK inheritance and missed the Form 3520 filing.