Another US tax year may have come to a close, but for Americans living in the UK, this means it is time to put things in order for April 5th.
As we approach the end of the UK tax year, here are four things Americans in the UK need to think about in terms of financial planning.
Whilst we do not provide tax advice, we collaborate with you and your tax adviser to structure your wealth in the most tax-efficient way possible.
01 Make use of ISA and pension allowances
The first thing to do is take care of what many see as basic UK tax planning – contributing to Individual Savings Accounts (ISA) and pensions. Although this may seem obvious, not everyone remembers to use these allowances each year.
There is no reason why Americans living in the UK can’t contribute to a pension, but it is important to select the right pension vehicle and be aware of how personal and employer contributions are taxed from a US perspective, and how to use any foreign tax credits on your income.
One benefit is that, for anyone who hasn’t used the full annual allowance in a particular tax year, it is possible to carry forward unused contributions from the previous three tax years. By carrying forward unused pension contributions, it is possible to reduce a tax liability.
Two very important points for this year are the removal of the lifetime allowance charge, and the increase of the annual allowance to £60,000. Previous people would stop contributing to their pensions as they had reached the ceiling of £1,073,100, this has now been removed so it’s definitely time to review.
The other point is that US tax authorities view ISAs as normal investment accounts and not tax-free vehicles like they are the UK. There is still some benefit to using them, but the assets held within them need to be compliant from a US perspective and they should be managed with a view to eventually paying capital gains tax to the IRS (Internal Revenue Service).
02 Offset investment gains and losses
Americans who are resident in the UK pay tax to HMRC 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 from a sterling perspective.
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.
For 2023/24 it’s important to note that the UK capital gains allowance has dropped to £6,000. This drops again to £3,000 from 2024/25.
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 $13,610,000 lifetime gift and estate tax allowance and can give up to $18,000 to any individuals they want each year. They can also give $185,000 to a non-American spouse each year without it forming part of their $13.61m. 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.
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.
04 Residency Planning
For non-domiciled taxpayers it’s always wise to review your residency position prior to year-end, particularly if you’re approaching significant milestones like the 8th or 16th year Strategic pre-planning is crucial in such cases.
There are also deadlines for claiming the foreign capital loss election for previous years, another thing to be mindful of. Making this election is not always an obvious decision.
Residency planning is very personal based on your individual situation and time spent in the UK/ US/ other countries. Should you have any inquiries regarding this matter or any other topic discussed above, please feel free to reach out to the Tax & Advance Planning team.
