“What do you think is going to happen to Capital Gains Tax?” This is currently the first item on the agenda in every client meeting. The second item, “And what should I do?”
Something which is top of mind for all clients, becomes even more complicated for US citizens living in the UK, where they could be subject to Capital Gains Tax (CGT) on an arising basis, but are also taxed on worldwide gains in the US. Whilst the overall tax payable is only due once (foreign tax credits offsetting what has been paid), the tax situation can be exacerbated by foreign exchange movements that can multiply the CGT cost.
Why is CGT at the forefront of clients’ minds?
In the UK, the Office of Tax Simplification (OTS) published a CGT review in November 2020, whereby an alignment of CGT and Income Tax rates is assessed as a means of creating a more neutral and less complicated UK tax system. The review also suggests the reduction to the annual CGT allowance as well as to other CGT reliefs and measures.
In the US, President Biden published plans in his election manifesto that would also seek to align lower long-term CGT rates with Ordinary Income Tax rates. Although this has been clarified to “asking those making more than $1 million to pay the same rate on investment income that they do on their wages.”
Whilst there is no crystal ball available, it is far-fetched to imagine imminent cuts to the rates of CGT in either country.
In the US, the Democrats now have more support to pass tax legislation due to the more equally divided senate after Georgia State runoff elections. This could mean that CGT changes in the US could be closer than initially anticipated.
Chancellor Rishi Sunak will be delivering his Budget in the UK on 3rd March, where he will lay out his tax proposals, including any changes to the current UK CGT regime.
So, what could you do now?
Do nothing – The first thing to consider is do you need to crystallise a gain now? If your investments are for the long-term, ask yourself why you would want to create a taxable event now. Tax rates always fluctuate over time, so even if there is a CGT rise in the near term, there may be a reduction again in the future.
Create certainty – However, if you have known near-term expenses, then you may wish to sell assets now with the certainty of the tax payable.
What other actions could you consider?
If you are exposed to tax in the UK and/ or US, then you may wish to seek tax advice prior to taking any action. Some ideas to consider, include:
Gifting assets – If you are already thinking about passing assets to the next generation, then lifetime giving, depending on how and to whom, may be a sensible strategy.
Charitable giving – Donors can gift appreciated assets to charity without creating a CGT event. Dual-qualifying US/UK Donor Advised Funds can be used to cover both jurisdictions.
Discretionary Trusts – Donors can gift assets into trust to allow for planning around when the CGT is paid by the donor or the trustees.
So, the answer every time to the question about CGT is, “it depends”.
Every individual should assess their personal circumstances and take professional advice about the investment and tax implications before selling. However, taking too long to decide could narrow down your options. Whilst London & Capital do not offer tax advice, we can work closely with your accountants to ensure that your wealth and tax planning are closely aligned and consider any tax repercussions. If you have any questions about CGT or your wealth planning, please get in contact with us using the form below.
To get more US Expat content direct to your inbox monthly, sign up to our newsletter here.
If you would like to speak to someone about your investment requirements, please use the contact from here.