As one deadline passes, another approaches at least that is the case for American citizens living in the UK. Just as you exhale after the US deadline, it’s time to begin considering end of tax year planning for your UK tax affairs before 5th April.
We’ve put together a non-exhaustive list of the main planning points that all US/UK taxpayers should be discussing with their advisers before 5th April.
01 Make use of ISA and pension allowances
This is probably one of the most basic and straight forward planning points that should be discussed with your wealth manager every tax year. It seems obvious but is often overlooked especially for those ultra-high net worth families, the allowances of £20,000 for ISAs and up to £40,000 for pensions can seem insignificant for very wealthy families. However, over a decade, this adds up to £600,000 plus any tax-free investment growth, and it’s simple to do.
As always for Americans there is an additional layer of complication. Whilst contributing to a pension as an American is quite straight forward, it is important that the implications of US taxation are accounted for.
Things to consider include but are not limited to:
- how personal employer contributions are taxed in the US
- how foreign tax credits can be optimised for the most tax efficient outcome on both sides of the Atlantic
For the current tax year, individuals can contribute £20,000 into a cash or investment ISA, all contributions can benefit from growth and income which will not be subject to UK tax, whilst this isn’t the case for US tax, it’s a substantial benefit for UK tax payers. The ISA contribution is a “use it or lose it” allowance. If contributions are not made by 5th of April each year, the opportunity is lost.
Unfortunately, US tax authorities do not assign any tax efficient status to ISAs and view them as standard investment accounts but for UK tax they still provide their benefits. However, it is important that the investments within the ISAs are compliant for US tax purposes and an investor must bear in mind that there will likely be some capital gain liability from a US tax perspective.
Pension contributions don’t have the same rigid “use it or lose it” rules and offer slightly more flexibility. Currently the standard pension allowance is £40,000 a year subject to some certain limits and rules. Unlike the ISA allowance if you don’t use it, you can save it up for up to three years, some individuals could have as much as £120,000 to contribute into a pension and reap all the associated tax rewards.
02 Offset investment gains and losses
Americans who are resident in the UK pay tax to the IRS on all their worldwide income and gains regardless of location. This means all investment accounts need to be considered, whether held in the US or any other jurisdiction.
Therefore, it is important to keep track of any assets that were bought and sold during the year and then view any gains or losses, considering the relevant currency for the tax authority in question.
Complicating matters is that efforts to reduce a tax liability in one jurisdiction could lead to an unwanted tax bill in the other. A UK investment portfolio won’t be managed to minimise dollar-based gains and losses at US tax year end, and this can incur capital gains taxes in a client’s US tax return. The same is of course true in reverse for a US investment manager.
The experts within our US team will always be mindful of how currency will affect gains for the relevant tax authorities.
03 Gifting and charitable donations
When looking to gift assets to the next generation or make charitable donations, there are several pitfalls to avoid. The US has a more generous regime than the UK when it comes to gifting assets to family or friends, so any gifts need to be factored into a UK wealth plan or they need to be dual-compliant.
US citizens have an $11,700,000 lifetime gift and estate tax allowance $23,400,000 for married couples. This allowance is also available for US domiciled individuals who are not US citizens. Individuals subject to US estate tax can also gift $15,000 every year to any individual free of tax. For those with non-US spouses they can gift up to $159,000 annually to their spouse with no tax consequences. These allowances are not recognised in the UK, and UK inheritance tax (IHT) will be due if they die within seven years of the gift date.
Similarly, when making charitable donations, tax breaks are only earned on both sides of the Atlantic if donations are made into dual-qualifying charities – in other words, those that are registered charities in both the US and UK. Many US charities (including many college endowments) are not recognised as charities in the UK and cannot be used to reduce a tax bill with HMRC, and this can catch people out. It is therefore important to check the status of any charities. Using a method or structure from which it is possible to make donations to charities in either jurisdiction (e.g. a Donor-Advised Fund) becomes a useful means to maximise the benefit.
From a UK tax perspective, those who are UK domiciled, typically anyone born in the UK who has maintained strong links here or anyone resident for 15 of the last 20 complete tax years will be liable to UK inheritance tax on their death. There are various exemptions and allowances but the key planning point for every tax year is to ensure that all gifts have been recorded for that current tax year, detailing the market value at the time and the recipient.
04 Becoming ‘deemed domiciled’
Long term UK residents coming up to 15 years of residency in the UK will now be ‘deemed domiciled’ in the UK, meaning they are taxed on their worldwide income and gains and don’t have the option to claim the remittance basis any longer.
Prior to the 15 years (assuming the individual is non domiciled and meets the correct 15 of 20 year residency rules) resident non-doms could elect to pay tax on a remittance basis in the UK. Tax was paid on UK income and gains during the tax year they arise, but foreign income and gains were taxed only when they were brought – or remitted – to the UK.
Residents who are now deemed domiciled in the UK will no longer be able to use the remittance basis. Instead, they will be taxed on an arising basis for worldwide income and gain. Becoming deemed domiciled also has some impacts on your estate planning so speak to your adviser and see if there is any planning that can be done.
If you have any questions about your tax year end planning, please get in contact with us using the form below.
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