Welcome relief for beneficiaries of US trusts? How UK tax resident US citizens can mitigate double taxation

• 10 March 2026
• News

US citizens¹ who are UK resident beneficiaries of US trusts may be taxed twice on the trust’s income or capital gains because of the overlapping scope of UK and US taxation. The UK/USA Double Taxation Convention (the Treaty) may not serve as the desired panacea where there is a mismatch in either (i) the timing of tax liabilities, or (ii) the taxpayer’s identity under the domestic laws of each jurisdiction.

This potential liability to double taxation may be an unfair cost of using such trusts to benefit members of transatlantic families. However, as outlined below, there are options for mitigating this exposure so that a UK resident beneficiary may benefit from a US trust without suffering cross-border double taxation.

Double taxation and US domestic trusts

As noted above, a mismatch in the timing of tax payments or the identity of the taxpayer may affect the ability of the taxpayer(s) to claim treaty relief and can result in double taxation. Set out in the table below are the persons chargeable to tax in each jurisdiction on income and gains arising in US domestic trusts that are not UK resident for UK tax purposes. It is assumed that the grantor is a US citizen and non-UK resident and the beneficiary is UK resident.

In the case of grantor trusts, to the extent that both a grantor (in the US) and a beneficiary (in the UK) are taxable on the same income or gain, the “exchange of notes” to the Treaty regards the beneficiary’s tax liability as being the grantor’s liability. In this way, the Treaty can mitigate the mismatch in the taxpayer’s identity. However, the time limits in the US for when tax credits can be used may still result in double tax. In many cases, where the UK tax liability does not arise until several years after the US tax has been paid, the US time limits will prevent the UK tax from being credited against the US tax bill.

Managing the exposure to double taxation

A UK resident US citizen beneficiary could be taxed twice if they are chargeable to UK tax² and they receive the distribution after the end of the calendar year following that in which the income or gain arose. Outlined below are some options for managing such exposure.

Trustees lend to beneficiaries

Loans to beneficiaries could be made on interest-free and ‘repayable on demand’ terms. The beneficiary would be treated as receiving a taxable benefit to the extent that the interest paid (if any) was less than interest at HMRC’s official rate (3.75 per cent from 6 April 2025)³. For an additional-rate taxpayer, the effective rate of income tax on the benefit of not having to pay interest on the outstanding loan is currently 1.6875 per cent of the value of the loan per annum.

Give UK beneficiaries a right to the US trust’s income

If the net income of the trust were distributed regularly, say each quarter, to the beneficiary who is UK resident and a US citizen, any UK income tax paid on the income could be claimed as a foreign tax credit in the US, provided the UK tax was paid either in the calendar year in which the income arose or by the end of the subsequent year⁴.

Using capital payments to match the US trust’s capital gains

Managing a UK resident beneficiary’s exposure to double taxation on a US trust’s capital gains is more challenging, largely due to the complex rules that apply to the UK taxation of income and gains arising to non-UK resident trusts. If the trustees can include gains within a trust’s DNI for US tax purposes, consideration could be given to making “capital payments” (distributions and other benefits that are not chargeable to UK income tax) to the beneficiary in the same year that the gains are realised by the US trust. This should align the timing of the tax liability in both jurisdictions, allowing double tax relief to be claimed. However, from a UK perspective, this option is effective only if the US trust has no “relevant income” (which includes “offshore income gains” arising on the disposal of non-UK collective investments without UK reporting status), because benefits are taxable by reference to trust’s relevant income in priority to its realised gains.

However, making annual distributions of the trust’s gains reduces its effectiveness as a vehicle for a family’s succession plan by removing funds from a trust that may fall outside the scope of UK inheritance tax and may be exempt from generation-skipping transfer tax for US purposes.

Other options

Depending on the circumstances, and especially if an individual beneficiary is likely to remain UK tax resident for the long-term, other options can be considered, including (i) terminating the trust and distributing funds to the UK resident beneficiary, or (ii) making the trust UK tax resident. A detailed exploration of these options is beyond the scope of this article.

Conclusion

The beneficiary’s potential liability to double taxation may be managed in the following ways:

• For short-term funding needs, the beneficiary could borrow from the US trust on interest-free and ‘repayable on demand’ terms.
• The trustees could give the beneficiary an entitlement to the US trust’s net income to facilitate the claiming of tax credits in the jurisdiction that does not have primary taxing rights.
• Capital payments equal to the trust’s gains realised in a given year could be paid to the beneficiary in the same year, as long as the trust has no accumulated relevant income and the gains can be included within the trust’s DNI for US tax purposes.
• If the individual is likely to remain in the UK for the long-term, the trustees may wish to consider whether it would be appropriate to terminate the trust or make it UK tax resident.

Whichever method is adopted, the timing of tax payments in both jurisdictions and the selection of appropriate investments must also be carefully monitored. Advice should be sought to determine which option is most suitable.

Disclaimer

The members of our US/UK team are admitted to practise in England and Wales and cannot advise on foreign law. Comments made in this article relating to US tax and legal matters reflect the authors’ understanding of the US position, based on experience of advising on US connected matters. The circumstances of each case vary, and this article should not be relied upon in place of specific legal advice.

1. For simplicity this article refers to the position for US citizens, but Green Card holders would generally be in the same position. ↩︎
2. While the remittance basis was abolished on 6 April 2025, an individual who formerly claimed the remittance basis can be subject to UK tax on unremitted foreign income and gains if they later remit such income and gains to the UK. In the US/UK context, double tax could arise, for example, if an individual previously claimed the remittance basis on a distribution paid to a non-UK account and they later remit to the UK sums from that account. ↩︎
3. This assumes that the characterisation of the payment as a loan is respected by HMRC. This treatment could be challenged, for example, if the beneficiary had no intention to repay the loan and in that scenario the borrowed sum could also be exposed to UK tax. ↩︎
4. In theory difficulties may arise if a person is treated as being taxed on income from a different source in each jurisdiction; a life tenant may be regarded as being entitled to the trust’s net income as of right, or as only having a right to hold the trustees to account for the net income. In practice, where the US has primary taxing rights, HMRC will give a tax credit to a beneficiary even where there is a mismatch in the source of income. ↩︎