Global Inheritance Tax Allowances Compared: Exemption Thresholds in the UK, US, and Japan

The decision by the UK’s Chancellor of the Exchequer, Rachel Reeves, to abolish the “non-dom” tax regime effective 6 April 2025 has triggered the most significant re-evaluation of cross-border inheritance planning in a generation. Under the new rules, individuals domiciled outside the UK but resident for more than four years will now face UK inheritance tax (IHT) on their worldwide assets, a departure from the previous remittance basis that shielded foreign assets from IHT for up to 15 years. This single policy shift, estimated by HM Revenue & Customs (HMRC) to affect approximately 68,700 individuals in the 2025/26 tax year alone, has compelled Hong Kong families with UK ties — whether through property, school fees, or business interests — to urgently reassess their estate plans. Simultaneously, the United States maintains its own aggressive estate tax regime with a USD 13.61 million exemption per individual (indexed for inflation in 2025), while Japan imposes one of the world’s highest inheritance tax rates, reaching 55% on estates exceeding JPY 600 million, with a relatively low basic exemption of JPY 30 million plus JPY 6 million per statutory heir. For the Hong Kong high-net-worth (HNW) family office principal or CFO managing cross-border succession, understanding these three jurisdictions’ exemption thresholds, rate structures, and compliance obligations is no longer optional — it is a fiduciary necessity.

The UK’s Post-Non-Dom Inheritance Tax Regime: Worldwide Exposure After Four Years

The abolition of the non-domiciled (non-dom) status for inheritance tax purposes represents the most consequential change to UK estate planning since the introduction of the IHT regime in 1986. Effective from 6 April 2025, any individual who has been UK resident for at least four out of the seven preceding tax years will be deemed domiciled in the UK for IHT purposes. This means their entire worldwide estate — including Hong Kong property, BVI-incorporated holding companies, and Cayman Islands trust structures — becomes subject to UK IHT at 40% on the value exceeding the nil-rate band of GBP 325,000 (unchanged since 2009) and the residence nil-rate band of up to GBP 175,000 for a main residence passed to direct descendants.

The Four-Year Deemed Domicile Rule and Its Practical Impact

The new rule, codified in Schedule 9 of the Finance Act 2025, replaces the previous 15-year deemed domicile threshold. Under the old regime, a non-dom could hold foreign assets indefinitely without IHT exposure provided those assets remained outside the UK. The new framework eliminates that shelter entirely for long-term residents. Data from HMRC’s 2024 “Non-Domiciled Taxpayers” statistical release shows that 68,700 individuals claimed non-dom status in the 2022/23 tax year, with an estimated GBP 10.5 billion in aggregate foreign income and gains sheltered. Of these, approximately 42% had been UK resident for more than seven years, meaning they would immediately fall under the new deemed domicile rules in 2025. For Hong Kong families, the most common trigger scenario is a parent who moves to London for a child’s university education, stays for four years, and maintains a Hong Kong property portfolio — that portfolio is now fully exposed to UK IHT.

Excluded Assets and the Overseas Work Relief

The Finance Act 2025 introduces a narrow carve-out: assets held in an “excluded property trust” settled before 6 April 2025 by a non-dom settlor who was not deemed domiciled at the time of settlement will remain outside the UK IHT net. This grandfathering provision, however, applies only to trusts settled before the rule change. Any additions to such trusts after 5 April 2025 will be treated as new settlements and subject to the new rules. Additionally, the “overseas work relief” for IHT — which previously shielded foreign situs assets from IHT for the first 15 years of residence — has been abolished entirely. The only remaining exception is for individuals who have been UK resident for fewer than four out of the past seven years, who retain the pre-2025 regime. For the Hong Kong executive on a three-year secondment to London, the window is now three years, not 15.

The US Federal Estate Tax: USD 13.61 Million Exemption and the Non-Resident Alien Trap

The United States operates a fundamentally different inheritance tax system — one that taxes the worldwide estate of US citizens and domiciliaries but imposes a far more limited tax on non-resident aliens (NRAs). For a Hong Kong resident who is a US citizen or green card holder, the federal estate tax exemption for 2025 is USD 13.61 million per individual (indexed for inflation under IRC Section 2010(c)(3)(B)), with any excess taxed at a top marginal rate of 40%. For NRAs — a category that includes most Hong Kong permanent residents without US citizenship or domicile — the exemption is drastically lower: only USD 60,000 (under IRC Section 2106(a)(3)(A)). This disparity creates a critical trap for Hong Kong families holding US situs assets such as US real estate, shares in US corporations, or brokerage accounts.

The USD 60,000 NRA Exemption and the “Situs Asset” Definition

Under IRC Section 2103, a non-resident alien’s US estate tax liability is calculated only on assets “situated in the United States” at the time of death. This includes real property located in the US, tangible personal property physically present in the US, and shares in US corporations (even if the share certificate is held in Hong Kong). Critically, shares in a non-US corporation (e.g., a Hong Kong-incorporated holding company) are not US situs assets even if the corporation owns US real estate. The USD 60,000 exemption means that a Hong Kong resident who owns a USD 1.5 million apartment in New York City — a common scenario among HNW families — would face a federal estate tax of approximately USD 576,000 (40% on USD 1.44 million above the exemption). This is before any state-level estate or inheritance tax, which applies in 12 states plus the District of Columbia, with exemptions as low as USD 1 million in Massachusetts and Oregon.

The Marital Deduction and Portability for Hong Kong Couples

The US unlimited marital deduction (IRC Section 2056) allows assets passing to a surviving spouse who is a US citizen to be transferred free of estate tax. However, for a surviving spouse who is not a US citizen — a common scenario in Hong Kong where one spouse may hold a foreign passport — the deduction is limited to a Qualified Domestic Trust (QDOT) structure. The QDOT defers estate tax until the surviving spouse’s death or upon distributions of principal. For 2025, the QDOT threshold is USD 2,000,000 (indexed for inflation under IRC Section 2056A(b)(2)(B)). Portability — the ability to transfer the unused exemption of the first spouse to die to the surviving spouse — is available only to US citizens and domiciliaries, not to NRAs. This means a Hong Kong couple where one spouse is a US citizen and the other is a Hong Kong permanent resident cannot simply rely on portability; they must use a QDOT or restructure asset ownership to avoid the NRA trap.

Japan’s Inheritance Tax: The 55% Marginal Rate and the “Unlimited Tax Liability” for Heirs

Japan imposes one of the world’s most aggressive inheritance tax regimes, with a top marginal rate of 55% and a relatively low basic exemption. For deaths occurring on or after 1 January 2023, the basic exemption is JPY 30 million plus JPY 6 million per statutory heir. For a family of four (deceased plus three heirs), the total exemption is JPY 48 million (JPY 30 million + 3 x JPY 6 million). Any estate value above this threshold is subject to progressive rates ranging from 10% to 55%. The 55% rate applies to the portion of the taxable estate exceeding JPY 600 million per heir. Crucially, Japan imposes inheritance tax not on the deceased’s domicile but on the heir’s residence. Under Article 1-2 of the Japanese Inheritance Tax Law (相続税法第1条の2), a heir who is a Japanese resident — defined as having a jusho (domicile) in Japan for more than one year — is subject to Japanese inheritance tax on their worldwide inheritance, regardless of where the deceased was domiciled or where the assets are located.

The “Heir-Based” Taxation System and the Hong Kong Connection

This heir-based system creates a unique exposure for Hong Kong families. Consider a Hong Kong-resident father who dies holding a Hong Kong bank account, a BVI company, and a Cayman trust. If his daughter, who is a Japanese resident (e.g., living in Tokyo for work), inherits any portion of that estate, she is subject to Japanese inheritance tax on the entire inherited amount, even though the deceased and the assets are entirely outside Japan. The tax is calculated on a sliding scale: for a taxable inheritance of JPY 100 million, the effective rate is approximately 30%; for JPY 500 million, it exceeds 45%. The Japan National Tax Agency (NTA) reported in its 2024 statistical yearbook that 52,300 inheritance tax returns were filed for deaths in 2023, with total taxable assets of JPY 16.8 trillion, and an average effective tax rate of 18.6%. For Hong Kong families with a child studying or working in Japan, the inheritance planning implications are immediate and material.

The Gift Tax Integration and the “Renzoku” (Continuous) Taxation Principle

Japan integrates its inheritance tax and gift tax under a unified system. Gifts made within three years of death are clawed back into the estate for inheritance tax calculation (Article 19 of the Inheritance Tax Law). For gifts exceeding JPY 1.1 million per year per donor, a gift tax applies at rates up to 55%, matching the inheritance tax schedule. The “renzoku” (continuous) principle means that systematic gifting to reduce the estate — a common strategy in the UK and US — is largely ineffective in Japan. The NTA’s 2024 data shows that 1.2 million gift tax returns were filed for 2023, with total taxable gifts of JPY 3.1 trillion. For a Hong Kong HNW family with Japanese-resident heirs, the only effective planning tool is to restructure asset ownership to ensure the heir does not personally receive the assets — for example, by using a non-Japanese trust where the heir is a discretionary beneficiary rather than a vested beneficiary, though the NTA has increasingly challenged such structures under anti-avoidance rules (Article 64 of the Inheritance Tax Law).

Comparative Analysis: Exemption Thresholds, Rate Structures, and Planning Implications Across Three Jurisdictions

The three jurisdictions present fundamentally different risk profiles for a Hong Kong HNW family. The UK offers a relatively high exemption for UK-domiciled individuals (GBP 500,000 combined nil-rate bands) but imposes a 40% rate on the excess, with the new four-year deemed domicile rule dramatically expanding the taxpayer base. The US offers the highest federal exemption at USD 13.61 million for citizens and domiciliaries but the lowest for NRAs at just USD 60,000. Japan offers the lowest exemption (JPY 48 million for a typical family) and the highest top rate (55%), with a uniquely aggressive heir-based system that can tax assets with no connection to Japan other than the heir’s residence.

The “Residence” Trap and the “Domicile” Trap

The UK’s shift from a 15-year to a four-year deemed domicile rule means that a Hong Kong family considering a temporary relocation to London now faces permanent worldwide IHT exposure after just 48 months of residence. The US NRA trap means that a Hong Kong resident who buys a USD 1 million US property without proper trust or corporate structuring could leave their heirs with a USD 376,000 estate tax bill (40% on USD 940,000 above the USD 60,000 exemption). Japan’s heir-based system means that a Hong Kong family with a child studying at the University of Tokyo could face a 55% inheritance tax on a Hong Kong estate solely because the child is a Japanese resident.

Structuring Solutions: Trusts, Corporate Vehicles, and Insurance

For UK exposure, the grandfathering of excluded property trusts settled before 6 April 2025 provides a limited window for pre-emptive planning. For US NRA exposure, holding US real estate through a non-US corporation (e.g., a BVI company) removes the asset from US situs classification, provided the corporation is not engaged in a US trade or business. For Japan exposure, the use of a non-Japanese trust where the Japanese-resident heir is a discretionary beneficiary — not a vested beneficiary — can defer or eliminate Japanese inheritance tax, though the NTA’s anti-avoidance rules under Article 64 require careful drafting. Life insurance proceeds are generally exempt from UK IHT if written into trust, exempt from US estate tax for NRAs if the policy is owned by a non-US person, and exempt from Japanese inheritance tax if the beneficiary is a Japanese resident but the policy is issued by a non-Japanese insurer — though each exemption has specific conditions.

Actionable Takeaways for Hong Kong HNW Families

1. For any Hong Kong resident who has been UK resident for three years or more, a pre-6 April 2025 restructuring of excluded property trusts is time-critical, as the grandfathering window closes on 5 April 2025.
2. For Hong Kong families holding US real estate directly, transferring title to a BVI or Cayman Islands holding company before death removes the asset from US situs classification and eliminates the USD 60,000 NRA trap.
3. For Hong Kong families with a child studying or working in Japan, ensure that child is a discretionary beneficiary — not a vested beneficiary — of any family trust, to avoid triggering Japan’s heir-based worldwide inheritance tax.
4. For dual-UK-Hong Kong families, the GBP 325,000 nil-rate band has been frozen since 2009 and will remain frozen until at least 2028 per the Finance Act 2024 — this is a de facto tax increase of approximately 40% in real terms since 2009, requiring larger life insurance coverage to fund the IHT liability.
5. For Hong Kong families with US citizen heirs, the USD 13.61 million exemption is scheduled to revert to approximately USD 6 million on 1 January 2026 under the Tax Cuts and Jobs Act sunset provisions — any estate plan relying on the current exemption must be reviewed before year-end 2025.