The Autumn 2022 Budget introduced several changes which will take effect as of April 2023. Below is a non-exhaustive list of the main planning points for US/UK taxpayers should be discussing with their advisers with enough time to take actions in advance of 5th April.
01 Make use of ISA and pension allowances
ISA/JISA
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 taxpayers. 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.
For those taxpayers with minor UK resident children, parents or guardians can contribute up to £9,000 in a single tax year into a cash or investment Junior ISA. Although the UK tax will not be due on the growth and income within JISA, there will be US tax implications and additional reporting for parents to consider until the child turns 18 years old.
PENSION
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 up to £40,000 a year, subject to certain limits and rules based on income. Unlike the ISA allowance, if you don’t use your pension allowance, you can save it up for up to three years, whereby some individuals could have as much as £120,000 to contribute into a pension and reap all the associated tax rewards. Relief is tapered down for income above £240,000. Care should also be taken to stay within the pension lifetime allowance of £1,073,100.
02 Offset investment gains and losses
MATCHING THE US AND UK CAPITAL GAINS
Americans who are resident in the UK are potentially liable to 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, taking into consideration the relevant currency for the tax authority in question.
Complicating matters, is that the 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.
CAPITAL GAINS ALLOWANCE
From 6th April 2023, the tax-free Capital Gains annual exemption will be reduced from £12,300 to £6,000, with a further reduction to £3,000 expected from April the following year.
The Capital Gains Tax rate payable on gains above annual exemption will remain unchanged in the new tax year. However, it may be relevant to review the level of gains and utilise the current level of tax-free allowance ahead of 5th April 2023.
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 a very generous $12,920,000 lifetime gift and estate tax allowance for individuals, or $25,840,000 for married couples. This allowance is also available for US domiciled individuals who are not US citizens. Any gifts made after 2025 will be subject to pre-2018 lifetime gift and estate tax allowance limits as the current allowance is scheduled to sunset.
Individuals subject to US estate tax can also gift $17,000 every year to any individual free of tax. For those with non-US spouses they can gift up to $175,000 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 charity. UK taxpayers should consider using a structure from which it is possible to make donations to charities in either jurisdiction, such as a dual-qualifying Donor-Advised Fund 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 in the UK 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 gains. Becoming deemed domiciled also has some impacts on estate planning so speak to your adviser and see if there is any planning that can be done.
Prior to becoming deemed domiciled, individuals may consider settling an offshore trust, known as an excluded property trust (EPT). EPT’s can be used to shelter non-UK assets from inheritance tax when the settlors become deemed domiciled.
05 Other points to consider
Although Autumn 2022 Budget was eventful and various above changes were introduced, it is also worth noting the below areas which could be relevant for some US/UK taxpayers ahead of 5th April and thereafter.
INCOME TAX
For the UK taxpayers paying the highest rate of UK tax, the income threshold at which the rate of tax will become payable will decrease to £125,140 meaning that the taxpayers will face an income tax increase from 6th April 2023.
Any UK taxpayers receiving dividend income above the tax-free allowance will be affected in two ways in the new tax year. The current tax-free dividend allowance of £2,000 will be reduced to £1,000. In addition, the tax rate at which dividend income will be taxable will increase by 1.25%.
EIS/SEIS/VCT INVESTMENTS
EIS/SEIS and VCT investments are attractive for UK taxpayers as these allow for the tax relief up to 30% – 50% to be claimed on the amount of investment. There is also no Capital Gains Tax assessed if the shares are held for over three years.
Although these investments provide several benefits for UK tax purposes, there are few things to remember if you are a US taxpayer. Firstly, if you realise a gain on your investment, there will be a taxable capital gain tax to pay in the US regardless of how long you held the investment for. Secondly, there will be additional annual information reporting requirements which will vary depending on your ownership percentage and amounts invested.
BASIS PERIOD REFORM
Self-employed traders and partners in trading partnerships who do not prepare the accounts in line with the UK fiscal year will face significant changes from 6th April 2024. The changes introduced will impact those having accounts drawn to a different date than 5th April of each year.
If you are self-employed or a partner in the partnership, it is highly encouraged to consult with your tax adviser as the new basis period reform rules are rather complicated.
OLD BANK ACCOUNT CLOSURE
As a US taxpayer, you may be aware of the annual Foreign Bank Account Reporting (FBAR) requirement to report all your non-US bank accounts and maximum balances. If there are any old bank accounts which are no longer in use, it may be a good idea to close such accounts during the current calendar year as these will not fall under the reporting requirements during the next reporting cycle.
If you have any questions about your tax year end planning, please get in contact with us using the form below.
