THE TRANSATLANTIC MAGAZINE
THE TRANSATLANTIC MAGAZINE
There are an increasing number of individuals and couples who may find it difficult to start a family independently and are therefore considering the use of US‑based surrogates. In the United States, surrogacy laws are determined at the state level, which often provides parents and surrogates with greater flexibility and certainty than in the UK, where only altruistic surrogacy is currently legal.
At present, despite political rhetoric in recent years, all babies born in the United States automatically acquire US citizenship under the Fourteenth Amendment to the US Constitution. There are very limited exceptions, including children born to certain foreign diplomats or military personnel, and a small number of births occurring on ships or aircraft in US territory. Accordingly, babies born in the US to surrogates will automatically become US citizens, regardless of the nationality or residence status of the intended parents or the providers of the egg and sperm. Importantly, US citizenship cannot be refused or opted out of at birth, and it cannot be surrendered until the child reaches age 18.
Many parents see US citizenship as an asset for their children, offering protections and opportunities such as the right to live, study, and work in the US in the future. However, US citizenship also brings significant tax and financial planning considerations, which can catch non‑US parents unawares. The US operates a citizenship‑based tax system, meaning a US citizen child may have US tax and reporting obligations even if they live entirely outside the US and regardless of their age. We have set out some of these considerations below.
Common UK Savings Issues
Popular UK wealth‑transfer and savings vehicles can become problematic, including:
These may trigger US filing requirements, such as:
Crucially, the IRS does not recognise the UK tax‑free status of Junior ISAs or Premium Bonds, meaning income and gains may be taxable in the US.
Trusts, Gifts and Family Wealth Structures
Families with trusts, whether established in the UK or elsewhere, should seek specialist advice before any US citizen child receives a benefit, including payments for school fees or extraordinary expenses. US tax rules impose strict and potentially punitive penalties where distributions from non‑US trusts are not disclosed in an accurate and timely manner
Parents should also review the drafting of family trusts to ensure that children born via surrogacy fall within the class of beneficiaries. If not, amendments may be required.
The UK concept of a bare trust does not translate easily into the US system. Families with bare trusts should seek advice to determine whether these arrangements would be viewed by the IRS as nominee or custodial accounts, or as more complex trust structures.
Similarly, gifts or bequests from a non‑US person exceeding USD $100,000 in any calendar year must be reported to the IRS. It is quite common to see grandparents help with paying for school fees or university tuition costs. These kind of transfers whether done directly or indirectly could potentially be a reportable gift to the US citizen child.
Investing and Financial Planning
While the US has highly developed capital markets and widespread investment in stocks, bonds, and mutual funds, the IRS treats many non‑US investment products with suspicion. In particular, pooled non‑US investments can fall within the Passive Foreign Investment Company (PFIC) regime, leading to:
These rules could capture seemingly standard investments like mutual funds, ETFs and investment trusts. To avoid these issues, families often work with specialist US/UK‑connected financial advisers who structure investments that are compliant in both jurisdictions. These advisers can be a more suitable option than traditional high‑street banks or investment houses that traditionally cater to families with no US connections.
For families with business or farming wealth, transferring shares in closely held companies may trigger additional US disclosures and produce unexpected tax outcomes that do not align with UK timing or reliefs.
Life Insurance
Life insurance is a common part of family protection planning and may be particularly important in the case of sole parents. However, it is vital to ensure that any policy qualifies as life insurance under US tax rules. If it does not, the proceeds received by beneficiaries may be subject to US taxation.
As noted above, US citizenship cannot legally be relinquished until age 18 and must be done of the individual’s free will, without coercion. An exit tax can apply to so‑called “covered expatriates”. However:
To expatriate, the individual must also certify under penalty of perjury that they have been fully compliant with US tax obligations for the preceding five years. The fee for surrendering US citizenship will decrease from April 13, 2026 from $2,350 to $450 which could result in more dual nationals giving up their US passports.
Parents of US citizen children born via surrogacy should seek comprehensive US and UK tax, legal, and financial advice to ensure ongoing compliance and avoid unexpected liabilities.
Rachel Bentley is a Consultant and Leah Page is a Manager at audit, tax and business advisory firm, Blick Rothenberg.
