Do I have to report a UK inheritance to the IRS?

A US person who receives a bequest from a non-US individual above the reporting threshold for the calendar year must report it on Form 3520. The inheritance itself is generally not US taxable income — the obligation is informational, but the penalty for missing it is significant.

What is Form 3520 and when is it due?

Form 3520 is the Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts. It is filed separately from Form 1040, is sent to a different IRS address, and is due at the same time as the income tax return including extensions. See IRS.gov for the current instructions.

What is the penalty for a missed Form 3520 on a UK inheritance?

The penalty is calculated as a percentage of the value of the unreported distribution for each month it remains unreported, subject to a maximum percentage. Because it scales with the size of the inheritance, the exposure on a large estate can be substantial. Current rates are set out on IRS.gov.

Can IRS streamlined filing fix a missed Form 3520?

Where the failure was non-wilful, the streamlined foreign offshore procedures can be used to correct the missed Form 3520 alongside delinquent returns and FBARs in a single submission, with penalty relief. Eligibility depends on non-wilfulness and on the IRS not having already opened an examination.

Why did my UK solicitor not tell me about Form 3520?

A UK solicitor administering an estate and a UK accountant handling the deceased's self-assessment have no responsibility for, and typically no knowledge of, US filing requirements. This is why the obligation is so often missed — nobody in the UK-side process is looking at the beneficiary's US position.

Does receiving an inheritance from a UK trust change the reporting?

Yes, significantly. Distributions from a foreign trust are reported differently from a straightforward bequest from an individual, and can carry income tax consequences as well as reporting obligations. A UK will trust or discretionary trust should be reviewed before assuming simple gift reporting applies.

How do I convert a sterling inheritance to US dollars for the threshold test?

The value is converted to US dollars using an appropriate exchange rate for the date of receipt. Because the threshold is a dollar figure, exchange-rate movement alone can push a sterling bequest over the reporting line, so the conversion should be documented at the time.

IRS Streamlined Filing for UK Inheritance Form 3520

IRS Streamlined Filing for UK Inheritance Form 3520 |

IRS Streamlined Filing for UK Inheritance Form 3520

IRS Streamlined Filing and UK Inheritance Form 3520

IRS streamlined filing combined with a Form 3520 correction for a UK inheritance is one of the most specific and technically consequential compliance scenarios for UK-resident Americans — because the missed Form 3520 generates a penalty that is calculated as a percentage of the distribution amount, making the financial stakes of the missed filing directly proportional to the size of the inheritance. A US citizen who receives a UK inheritance from a non-US person — a parent, grandparent, or other UK-domiciled relative — above $100,000 in a calendar year must file Form 3520 Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts. Furthermore, the most common pattern in a UK inheritance context is that the US citizen receives the inheritance — cash, shares, or property proceeds — without any awareness of the Form 3520 obligation, since neither the UK solicitor managing the estate nor the UK accountant handling the deceased's self-assessment would have any knowledge of or responsibility for the US filing requirement. Additionally, the missed Form 3520 penalty is 5% of the value of the inheritance per month for up to 25 months, producing a maximum penalty of 25% of the value of the inheritance where the form has been missed for two years or more. Consequently, the IRS streamlined filing submission for a UK-resident American who has received a UK inheritance and also has FBAR compliance gaps provides the most efficient route to correcting both the missed Form 3520 and the FBAR gaps simultaneously — under the non-wilfulness framework that protects against the full statutory penalty where the non-compliance was not intentional.

Form 3520: Understanding the UK Inheritance Obligation

When Form 3520 Is Required for a UK Inheritance

Form 3520 is required where a US person receives a bequest or inheritance from a non-US person — including a deceased UK-domiciled individual — where the aggregate value of all such bequests and inheritances received from that non-US person during the calendar year exceeds $100,000. Furthermore, the $100,000 threshold is calculated at the calendar-year exchange rate — a bequest of £80,000 received in a year when sterling was at 1.29 produces a dollar value of $103,200 and triggers the Form 3520 obligation. Additionally, the Form 3520 for an inheritance is filed separately from the Form 1040 — it has its own deadline of the due date of the Form 1040, including extensions — and is not automatically included by any US tax software without specific prompting for the foreign gift or bequest section. Consequently, IRS streamlined filing assesses the Form 3520 obligation for every UK-resident American engagement where a UK inheritance has been received — confirming the dollar value of the inheritance in the year of receipt before any missed filing penalty calculation is undertaken. The IRS Form 3520 guidance is at https://www.irs.gov/forms-pubs/about-form-3520.

The Missed Form 3520 Penalty Structure

The penalty for failing to file a required Form 3520 for a foreign gift or bequest is 5% of the amount of the gift or bequest per month that the form remains unfiled — up to a maximum of 25% of the inheritance amount after five months. Furthermore, where the Form 3520 has been missed for several years — for example, where the inheritance was received three years before the engagement begins and no Form 3520 was filed in any intervening year — the penalty has been accruing at 5% per month, producing a maximum accumulated penalty of 25% of the inheritance value. Additionally, the IRS may separately assert the 5% per month penalty for each year the form was not filed, producing cumulative penalty exposure significantly above 25% of the inheritance value for multi-year missed filings. Consequently, IRS streamlined filing calculates the maximum penalty exposure for a missed Form 3520 before advising on the correction strategy — and in most cases recommends theIRS streamlined filing submission as the most protective approach where the FBAR and Form 1040 gaps also exist.

Combining the Streamlined Submission With Form 3520

How Form 3520 Fits Into the Streamlined Package

The IRS streamlined filing foreign offshore procedures cover three years of amended Form 1040 returns and six years of corrected FBARs — and where the missed Form 3520 falls within the three covered return years, the corrected Form 3520 is filed alongside the amended Form 1040 for the year of the inheritance. Furthermore, the IRS streamlined filing non-wilfulness certification on Form 14653 can directly address the missed Form 3520 — explaining that the individual was unaware of the US requirement to report a foreign inheritance and that the UK solicitor and UK accountant involved in administering the estate did not know of the US filing obligation. Additionally, where the missed Form 3520 falls within the streamlined covered period, the IRS guidance suggests that filing a corrected Form 3520 alongside the streamlined amended returns reduces the penalty exposure — since the Form 3520 non-wilfulness argument is reinforced by the broader non-wilfulness narrative in the Form 14653. Consequently, IRS streamlined filing includes the corrected Form 3520 as a component of the complete streamlined package — not as a separate standalone correction — and drafts the Form 14653 to address the Form 3520 non-wilfulness alongside the FBAR and Form 1040 non-wilfulness. The IRS streamlined guidance is at https://www.irs.gov/individuals/international-taxpayers/streamlined-filing-compliance-procedures.

Years Outside the Streamlined Window

Where the UK inheritance was received in a year before the three-year streamlined window — for example, where the inheritance was received four or five years before the engagement begins — the Form 3520 for that year falls outside the streamlined covered period. Furthermore, for years outside the streamlined window, the Form 3520 must be filed separately — with a penalty abatement request based on reasonable cause, explaining the same non-wilfulness facts that support the streamlined certification. Additionally, the penalty abatement request for a missed Form 3520 outside the streamlined window is evaluated by the IRS under the reasonable cause standard, and the standard factual narrative of UK solicitor and UK accountant reliance without any US adviser awareness of the Form 3520 obligation provides a strong reasonable cause argument. Consequently, IRS streamlined filing of the corrected Form 3520 for any year outside the streamlined window with a detailed penalty abatement statement — treating the correction of all missed Form 3520 returns as a complete package alongside the streamlined submission.

FBAR Implications of a UK Inheritance

Inherited UK Bank Accounts

Where the UK inheritance includes cash held in a UK bank account — and the US citizen is named as the executor or beneficiary of the estate with access to the account during the estate administration — the estate account may be a FBAR-reportable foreign financial account. Furthermore, where the US citizen has a financial interest in the estate account — as a beneficiary with a present right to the funds — the account balance is included in the FBAR aggregate for any year in which the account is held. Additionally, where the cash inheritance is paid into the US citizen's own UK current account — increasing the peak balance of that account significantly above its normal level — the FBAR for the year of the inheritance shows a higher peak balance in the personal current account than in typical years. Consequently, IRS streamlined filing specifically asks about the timing and mechanics of any UK inheritance payment in the account identification exercise — confirming whether the estate account or the personal current account carries the inheritance balance in the FBAR aggregate. The FinCEN FBAR guidance is at https://www.fincen.gov/financial-crimes-enforcement-network/fbar.

Inherited UK Shares and Investment Accounts

Where the UK inheritance includes shares or investment funds — received as part of a UK estate — those assets are transferred to the US citizen's name in a UK stockbroking account or nominee account. Furthermore, a UK stockbroking or nominee account in a US citizen's name is a foreign financial account — FBAR-reportable at its highest balance during the calendar year. Additionally, where the inherited shares are subsequently sold and the proceeds deposited into a UK current account, the FBAR for the year of the sale shows a higher peak balance in the current account reflecting the sale proceeds, and the nominee account is no longer FBAR-reportable after the shares are transferred out. Consequently, IRS streamlined filing tracks the movement of inherited assets through the account structure — confirming the FBAR-reportable accounts in each of the six covered years and identifying the specific peak balance year that drives the 5% penalty calculation.

The Non-Wilfulness Certification for a UK Inheritance

Drafting the Form 14653 to Address Form 3520

The Form 14653 non-wilfulness certification for an IRS streamlined filing submission that includes a missed Form 3520 must address two distinct compliance gaps — the FBAR and Form 1040 gaps on one hand, and the Form 3520 gap on the other. Furthermore, the Form 3520 non-wilfulness narrative is typically straightforward — the individual inherited from a UK relative in a process managed entirely by a UK solicitor and UK accountant, neither of whom had any knowledge of or responsibility for US reporting requirements, and the individual had no US adviser who raised the Form 3520 obligation at the time of the inheritance. Additionally, the Form 14653 must be factually accurate and consistent — where both an IRS streamlined filing adviser and a US-licensed CPA reviewed the returns in prior years without identifying the Form 3520 gap, the narrative must address why the prior advisers missed the obligation. Consequently, IRS streamlined filing drafted the Form 14653 to address the Form 3520 non-wilfulness facts specifically — confirming that the inheritance was not reported because the individual was not aware of any US requirement to do so, that the UK solicitor's role was purely the administration of the UK estate, and that no US-side adviser raised the Form 3520 obligation at any point.

Case Study: UK Inheritance and Combined Streamlined

Our team completed a combined IRS streamlined filing and Form 3520 correction for a US citizen in Manchester who inherited from her UK mother three years before the engagement. Furthermore, she had received the inheritance in two tranches — £140,000 in year one (the main estate distribution) and £28,000 in year two (a final account balance following the conclusion of the estate administration). She had never filed a Form 3520 for either year and had also never filed an FBAR.

The IRS streamlined filing analysis covered the following. Form 3520 year one: total inheritance £140,000. Dollar value at the year one Treasury year-end rate of 1.28: $179,200. Form 3520 required for year one — above the $100,000 threshold. Maximum penalty if not corrected: 25% of $179,200 = $44,800. Form 3520 year two: additional distribution £28,000. Dollar value: $35,840 at 1.28 rate. Form 3520 required for year two — even though below $100,000 individually, this was a bequest from the same deceased person and, combined with year one, exceeds the annual threshold. Furthermore, FBAR: the inheritance payment in year one inflated the peak balance of the personal current account (Halifax) to £168,000 (reflecting the receipt of the £140,000 before it was partially invested and partially distributed to purchase a UK flat for deposit). Six covered FBARs prepared — personal current account, stocks and shares ISA, and the UK flat subsequently purchased using part of the inheritance. Additionally, Form 14653: non-wilfulness certification addressed the UK solicitor-managed estate administration, the absence of any US adviser involvement, and the fact that the deceased mother had no US connections, and the estate was an entirely UK domestic matter from the UK side. Consequently, the IRS streamlined filing submission included: three amended Form 1040 returns with the corrected Forms 3520 for years one and two attached to the relevant amended returns, six corrected FBARs, including the inflated personal current account balance in year one, and a 5% streamlined penalty of $22,960 calculated on the highest aggregate FBAR balance in year one.

Common Form 3520 and Inheritance Mistakes

Not Filing Form 3520 Because the Inheritance Is UK Tax-Free

The most common Form 3520 omission error is the assumption that a UK inheritance is entirely tax-free and therefore creates no US reporting obligation. Furthermore, UK inheritance tax is paid by the estate — not the beneficiary — and the fact that the inheritance is UK tax-free for the beneficiary has no bearing on the US Form 3520 reporting requirement. The correct approach requires IRS streamlined filing to file Form 3520 for any UK inheritance above $100,000 received in a calendar year — regardless of whether any UK inheritance tax applied to the estate. IRS Form 3520 guidance at https://www.irs.gov/forms-pubs/about-form-3520.

Not Calculating the Penalty Before Advising on Strategy

Many advisers correct missed Form 3520 returns without first calculating the full penalty exposure, missing the potential benefit of the IRS streamlined filing non-wilfulness framework,k where the FBAR gap also exists. Furthermore, the Form 3520 penalty of 5% per month to a maximum of 25% can exceed $40,000 for a substantial inheritance. The correct approach requires IRS streamlined filing to calculate the maximum penalty exposure before recommending any correction strategy — and to advise on the IRS streamlined filing approach where the non-wilfulness facts support it, and the FBAR gap exists.

Not Including the Inflated Inheritance Year FBAR Balance

The most common FBAR error in an inheritance year is not identifying the peak current account balance that reflects the inheritance receipt — using the year-end balance or a typical monthly balance instead of the peak balance in the month the inheritance was received. Furthermore, the inheritance receipt may produce the highest FBAR aggregate for the entire six-year covered period. The correct approach requires IRS streamlined filing to obtain the full twelve months of current account statements for the inheritance year, identifying the peak balance in the month the inheritance was deposited. FinCEN guidance at https://www.fincen.gov/financial-crimes-enforcement-network/fbar.

How US-UK Tax Can Help

At US-UK Tax, our team of Enrolled Agents, Chartered Tax Advisers, and Certified Public Accountants provides specialist IRS streamlined filing and Form 3520 correction for Americans in the UK who have received UK inheritances. Furthermore, we calculate the maximum Form 3520 penalty exposure before advising on the correction strategy, prepare the corrected Form 3520 for all missed years, include the Form 3520 correction in the amended Form 1040 packages for the streamlined covered years, file penalty abatement requests for any Form 3520 years outside the streamlined window, identify the inheritance year FBAR peak balance from the full twelve months of account statements, and draft the Form 14653 to address the Form 3520 non-wilfulness alongside the FBAR and Form 1040 gaps.

Contact our team today. Email hello@us-uktax.com call 0333-8807974, or visit https://www.us-uktax.com/contact/.

Conclusion

The combined IRS streamlined filing and Form 3520 correction for a UK inheritance is the most effective approach where both the FBAR gap and the missed Form 3520 exist — because the Form 14653 non-wilfulness certification can address both gaps simultaneously, the corrected Form 3520 is included in the streamlined amended returns for the covered years, and the 5% streamlined penalty is substantially less than the 25% maximum Form 3520 penalty for a multi-year missed filing. Furthermore, the inheritance year is typically the year with the highest FBAR aggregate — the current account peak balance in the month the inheritance was deposited — making accurate peak-balance identification the most important document-gathering step in any inheritance year. Moreover, the Form 3520 obligation applies to UK inheritances above $100,000 regardless of whether any UK inheritance tax was paid on the estate, making the "UK tax-free inheritance" assumption the most common and most costly error in this specific compliance area. Contact US-UK Tax at hello@us-uktax.com or call 0333-8807974 today.

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FAQs

Q: When is Form 3520 required for a UK inheritance?

A: When a US citizen receives bequests from a non-US person exceeding $100,000 in a calendar year — converted to US dollars at the Treasury year-end rate.

Q: What is the penalty for a missed Form 3520?

A: 5% of the value of the inheritance per month, up to a maximum of 25% after five months. For a £140,000 inheritance ($179,200), the maximum penalty is approximately $44,800 if the form is not corrected.

Q: Can the streamlined procedures correct a missed Form 3520?

A: Yes. The corrected Form 3520 is attached to the amended Form 1040 for the inheritance year. Form 14653 non-wilfulness certification covers the Form 3520 gap.

Q: Does a UK inheritance need to be reported even if it is UK tax-free?

A: Yes. Form 3520 is a US reporting requirement independent of UK inheritance tax. The tax-free receipt by the beneficiary does not affect the US reporting.

Q: Does a UK inheritance affect the FBAR?

A: Yes. The inheritance receipt inflates the current account peak balance in the month it arrives — typically the highest FBAR aggregate in the six years.

Q: What does the Form 14653 need to say about a missed Form 3520?

A: The individual was unaware of the US requirement to report a foreign inheritance, a UK solicitor managed the estate, and no US adviser raised Form 3520.