Here is a reassuring fact and a dangerous trap in the same sentence: a gift or inheritance from your UK family is almost always free of US income tax — but failing to report it can cost you a penalty of up to 25% of the amount received. The reporting is done on Form 3520, an information return that catches a surprising number of Americans in the UK who inherit from a parent or receive help with a house deposit. This guide explains when you must file, the thresholds for 2025, and how to avoid a penalty on money that was never taxable in the first place.
Is a foreign gift or inheritance taxable in the US?
For the person receiving it, generally no. The US does not impose income tax on gifts or inheritances received — that is true whether the giver is American or foreign. US gift and estate tax, where it applies, is the responsibility of the giver or the estate, not the recipient, and a non-US person gifting non-US assets is usually outside the US gift-tax net entirely. So an inheritance from a UK parent, or a cash gift from UK grandparents, is normally not taxable income to you as a US recipient.
The catch is that 'not taxable' does not mean 'not reportable'. The US wants visibility of large transfers of money into the hands of US persons from abroad, so it requires an information return — Form 3520 — once the amount crosses a threshold. You owe no tax, but you must tell the IRS.
The reporting thresholds for 2025
Whether you must file Form 3520 depends on who the gift came from and how much you received in the year:
- Gifts or bequests from a non-resident alien individual or a foreign estate: report if the total from that source (and related parties) exceeds $100,000 in the year. This $100,000 figure is fixed and not indexed.
- Gifts from foreign corporations or foreign partnerships: report if the total exceeds $20,116 for 2025 (this figure is adjusted for inflation each year).
- Once you cross the relevant threshold, you report the gifts on Part IV of Form 3520 — and for the $100,000 category you generally itemise gifts over $5,000.
Aggregation: watch the related-party rule
The $100,000 threshold is not strictly per-person in isolation. If you receive gifts from foreign people who are related to each other — say £60,000 from your mother and £60,000 from your father in the same year — you must add them together, and the combined $120,000-equivalent crosses the $100,000 threshold even though neither parent individually gave you that much. This aggregation rule catches families who 'split' a gift between two parents assuming each is under the limit. Convert to US dollars at the relevant exchange rate when testing the threshold.
The penalty: why this form matters so much
Form 3520 is an information return with teeth. For an unreported foreign gift, the penalty can be 5% of the gift for each month the failure continues, up to a maximum of 25% of the gift. On a £200,000 inheritance, that is a potential penalty of £50,000-equivalent — on money that was never taxable. The IRS has historically been aggressive in assessing these penalties automatically, which is exactly why getting the form right (or fixing a missed one properly) is so important. There is reasonable-cause relief, but you do not want to rely on fighting a penalty after the fact.
Gifts vs foreign trusts — a crucial distinction
Form 3520 covers two very different things: reportable foreign gifts (Part IV) and transactions with foreign trusts (Parts I–III). The gift side is usually straightforward reporting. The trust side is far more complex and can bring annual filing and even tax consequences. This matters for Americans in the UK because some UK structures families use — certain trusts, and even some pension or savings arrangements — can be treated as foreign trusts for US purposes, pulling you into the harder part of Form 3520. If your 'gift' actually comes through a trust, get advice before assuming simple gift reporting applies.
Inheritances: the common scenario
The single most common Form 3520 situation we see is a US person in the UK inheriting from a parent or relative who dies in Britain. The inheritance itself is not US-taxable income, and UK inheritance tax (if any) is paid by the estate — but if your share exceeds $100,000-equivalent, you must report it on Form 3520 for the year you receive it. People often discover this months later, having assumed that because no tax was due, no filing was needed. The fix is usually straightforward if caught early, which is why flagging an expected inheritance to your tax adviser in advance is wise.
When is Form 3520 due?
Form 3520 is generally due at the same time as your income tax return, including extensions — so for most Americans abroad that means the 15 June automatic deadline (or October with an extension), aligned with the US filing deadlines for expats. Importantly, it is filed separately from your Form 1040, sent to a specific IRS service centre, not attached to your return. Missing the deadline is what triggers the penalty regime, so diarise it for any year you receive a large foreign gift or inheritance.
What you do — and don't — need to report
- Do report: a foreign inheritance over $100,000-equivalent; large cash gifts from foreign relatives over the threshold; gifts aggregated across related foreign givers.
- Don't over-report tiny gifts: ordinary birthday or holiday gifts well under the thresholds are not reportable.
- Do watch: gifts routed through a foreign trust or company, which follow different (often stricter) rules.
- Do keep evidence: the date, amount, currency, exchange rate and the relationship of the giver, in case the IRS asks.
What if you already missed it?
If you received a large foreign gift in a prior year and did not file Form 3520, do not panic — but do act. Because the penalty is severe, the right approach depends on your wider compliance. Where the missed 3520 sits alongside other unfiled obligations, the IRS Streamlined Filing Procedures can sometimes bring everything current together. Where your returns are otherwise clean, a late-filed 3520 with a strong reasonable-cause statement may be appropriate. This is a judgement call best made with a specialist, because how you fix it affects your penalty exposure.
How it fits the bigger expat picture
Form 3520 rarely travels alone. A large inheritance often lands in a UK bank account, which can push you over the FBAR reporting threshold and into Form 8938 territory, and if you reinvest it in UK funds you can stumble into PFIC problems. Receiving foreign money is a moment to review your whole US reporting position, not just the gift form. Handling the 3520, the account reporting and the reinvestment together keeps a windfall from quietly creating a stack of compliance issues.
Report the gift, keep the money
The good news is worth repeating: a gift or inheritance from your UK family is almost never taxable to you as a US person — the only real risk is failing to report it. Form 3520 is an information return, not a tax bill, but its penalties are harsh enough that it deserves attention in any year you receive a significant transfer from abroad. If you have inherited, expect to, or have received a large family gift, a US/UK tax specialist can confirm whether you need to file and make sure a tax-free windfall stays that way.
