Foreign Trusts & Form 3520 for US Persons in the UK

Foreign trusts and Form 3520 affect US persons in the UK who create, fund, or receive money from a non-US trust, or who receive a large foreign gift or inheritance. Form 3520 reports these events to the IRS, and late filing carries steep penalties, so timely, coordinated advice matters.

For a high-net-worth American or green-card holder who has built a life in the UK, this is one of the quietest and costliest traps in the tax system. A UK family trust, an inheritance from a British relative, or a well-meaning gift from a parent can each create a US reporting obligation that has nothing to do with owing tax — and everything to do with penalties if it is missed. This article explains when foreign trusts and Form 3520 come into play and how to put things right. It is general guidance, not advice on your own structure, which is where the real decisions are made.

Key takeaways

• Status, not residence, is what counts. US citizens and green-card holders are inside the foreign trusts Form 3520 rules wherever they live, so a UK home does not remove the obligation.
• UK trusts are "foreign" to the IRS. A UK family or discretionary trust is a foreign trust from the US perspective, and settling, benefiting from, or receiving distributions from one can trigger reporting.
• Grantor versus non-grantor status drives everything — who is taxed, on what, and which forms are due.
• Large foreign gifts and inheritances are reportable on Form 3520 once they cross a threshold, even though they are not themselves taxable in the US.
• The penalties are severe and percentage-based, which is exactly why catch-up should be handled properly and reviewed by a licensed professional.

What is Form 3520, and who must file it?

Form 3520 is the IRS information return for reporting certain transactions with foreign trusts and the receipt of large gifts or bequests from foreign persons. It does not, by itself, calculate a tax bill. It tells the IRS that something reportable has happened.

A US person generally has a Form 3520 obligation if they do any of the following: create or transfer money or property to a foreign trust; are treated as the US owner of any portion of a foreign trust; receive a distribution from a foreign trust; or receive a large gift or inheritance from a foreign individual or a foreign estate. Because these rules follow US citizens and green-card holders regardless of location, US persons in the UK are squarely within them. Where your wider US returns are also behind, our guide on missed US tax returns is a useful companion before you tackle the trust position.

Which UK structures trigger foreign trusts Form 3520 reporting?

The uncomfortable surprise for many clients is how ordinary the triggering structures are. A UK family trust set up by parents or grandparents, a discretionary trust holding a share of the family home or investments, a trust arising under a UK will, and some offshore trusts used in UK planning are all foreign trusts in US eyes. Being a settlor, an owner, or a beneficiary of any of them can create a filing duty.

Some arrangements that are not obviously "trusts" in everyday language can also fall within the definition, which is why a careful US characterisation of each structure is the essential first step. The point is not that these arrangements are wrong — they are usually created for sound UK reasons — but that they carry a parallel US reporting life that the family rarely knows about until it becomes a problem.

Grantor versus non-grantor trusts: why the distinction matters

The single most important classification is whether a foreign trust is a grantor or a non-grantor trust for US purposes.

A grantor trust is treated as owned by the person who funded it. Its income is attributed back to that US owner, who reports it on their return and files Form 3520, while the trust files Form 3520-A. A non-grantor trust is a separate taxpayer; US beneficiaries are generally taxed, and report on Form 3520, when they receive distributions — and distributions of accumulated income can be taxed under special rules that can be punitive if the trust has built up income over years. Getting this classification right at the outset determines who is taxed, on what, and when, so it is never a detail to leave until later.

What about a large foreign gift or inheritance?

Form 3520 is not only about trusts. A US person who receives a large gift or a bequest from a foreign person, or from a foreign estate, generally has to report it on Form 3520 once it exceeds a reporting threshold. Receiving a gift or inheritance is not itself a US taxable event — but the reporting duty is real, and the penalty for missing it is not softened by the fact that no tax was due.

Because the threshold is adjusted over time and differs depending on the source of the gift, we deliberately avoid quoting a figure here; confirm the current amount before assuming a transfer sits below it. For families where an inheritance also raises estate-tax questions, our companion piece on US estate and gift tax for Americans in the UK covers the other half of the picture.

Form 3520-A and the grantor's separate obligation

Where a US person is treated as the owner of a foreign trust, there is usually a second form in play: Form 3520-A, the annual information return of a foreign trust with a US owner. In principle the trust files it, but the US owner is responsible for ensuring it is filed and can face penalties if it is not — awkward when the trustees are a UK firm unfamiliar with US rules.

In practice, the US owner often has to prepare a substitute return to meet the obligation. Coordinating this with the UK trustees, and aligning it with the owner's own Form 3520, is exactly the kind of cross-border choreography that benefits from a single adviser overseeing both sides.

What are the penalties for filing Form 3520 late?

The penalties attached to foreign trusts and Form 3520 are among the most severe in the US international rules. Rather than a fixed fee, they typically start high and are calculated as a percentage of the amount involved — the value transferred to a trust, the distribution received, the unreported gift — and they can compound where a failure continues, so the exposure can be large relative to any tax that was ever at stake.

Reasonable-cause relief can be available, and penalties are not always sustained, but relief has to be claimed and evidenced properly. The practical lesson is simple: a late or missed Form 3520 is not something to sit on, because the downside grows and the defence is stronger when it is put forward deliberately.

How do US persons in the UK catch up?

If filings have been missed, there are established ways to come into compliance. Depending on the facts, that can mean a reasonable-cause submission for the trust forms alone, or — where US income-tax returns and other information returns are also outstanding — one of the IRS offshore compliance procedures that deals with the whole position together. The right route turns on why the returns were missed.

This is discreet, technical work best handled once, correctly. At Next Tax Source our cross-border team works alongside a CPA/EA and an ACCA-qualified accountant, so the US trust reporting and the UK trust and tax treatment are each handled by the right licensed professional, and every submission is reviewed and signed off before you rely on it. You can size up your wider position with our global tax calculators, read more on our US–UK expat tax service, or book a consultation to talk through your own trust or inheritance in confidence.

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Reviewed by a CPA / Enrolled Agent and an ACCA-qualified accountant. This article is general information for planning purposes, not advice on your specific facts; reporting thresholds, penalties and rules change, so confirm current figures and your own position before acting.

Last updated: 19 August 2026.

Official sources: IRS — About Form 3520 · IRS — About Form 3520-A · IRS — Foreign Trust Reporting Requirements and Tax Consequences · IRS — Gifts from Foreign Person