2016/17 tax planning for US individuals

As we draw to the close of the current UK tax year, Buzzacott's Expatriate Tax Services team have pulled together the key tax points that US individuals should consider.
Most US citizens and long-term residents (green card holders) are subject to tax in both the US and the UK. Year-end tax planning is therefore something that has to be considered twice, in the battle to minimise global taxes.

Follow the relevant links below to read more:

Pension planning                                     
Planning for Income Tax and Capital Gains Tax                         
Entrepreneurs’ Relief
UK Inheritance Tax (IHT)
Non-UK domicile rules
Offshore income gains
Foreign tax credits

In most cases, UK tax is higher than the equivalent US rate, but that is not always the case and so it is always worth taking specific advice before taking any action. Notwithstanding that, some things that are sensible for UK taxpayers are less appealing for a US taxpayer. 
US clients and contacts will have received a tax planning memorandum in December with a reminder of what should be considered before the end of the US tax year. If you did not receive that, please see here.  

Pension planning

While UK pension plans are not qualified for US tax purposes, UK pension planning can still often be effective at reducing the global tax rate in the short and longer term. Particular care needs to be taken if cumulative employee contributions are likely to exceed cumulative employer contributions and if pensions are moved or consolidated. Dependent on your situation, we usually suggest taking US tax advice in addition to UK advice, prior to making pension contributions, taking benefits or making a change to your existing arrangements. Also, with a number of changes to the pension tax rules in effect from 6 April 2016, it could be beneficial to consider whether you are at the limit for maximum pension contributions to utilise higher rate relief. 

Planning for Income Tax and Capital Gains Tax
Enterprise Investment Scheme (EIS) | Venture Capital Trust (VCT) | Seed Enterprise Investment Scheme (SEIS) | New ISA (NISA) | Investment bonds

UK tax-advantaged investments will not often have any beneficial impact on the US liability but can be effective in reducing UK tax. For individuals with excess foreign tax credits carried over from prior years, EIS investments can be an effective way to utilise these credits without incurring a US tax charge. Excess foreign tax credits carried forward to future years have a limited life of 10 years before they are wasted.

However, VCTs and investments within NISAs, are often considered Passive Foreign Investment Companies (PFICs) for US tax purposes. Therefore we would not normally recommend them for a US taxpayer because PFICs are subject to US anti-avoidance rules that make them tax inefficient. Cash NISAs are not PFICs and therefore the interest is simply taxed at US income tax rates and Net Investment Income Tax (NIIT) if due. In some cases it will be possible to find funds for a NISA that are not PFICs, but the investment options are more restrictive.

Entrepreneurs’ Relief

There is no US equivalent to Entrepreneurs’ Relief for the sale of UK businesses, so a gain that is subject to only 10% UK tax will most likely suffer an additional 10% US tax as well as NIIT at a flat 3.8%. That would give a global tax rate on a gain on the sale of a business asset of 23.8%. NIIT is not due on the sale of business assets, but it is due on the sale of shares, including those in privately owned companies.

UK Inheritance Tax (IHT)

Please see below the key differences with the UK and US estate tax regimes:

Tax regime Tax rate Estate threshold Threshold for a married couple
UK IHT (2016/17) 40% £325,000 £650,000*
US Estate Tax (2017) 40% $5,490,000 $10,980,000
* the new family home allowance may increase this threshold over time up to £1m.

Therefore, planning to avoid UK IHT can save in excess of $4m (for a married couple) if you are not yet fully subject to UK IHT, but might become so. Planning with trusts to mitigate UK IHT can work effectively for a US taxpayer, see attached Insight on What Americans living in the UK need to know about offshore trust tax planning.

Second, it is possible to make lifetime gifts in the UK, whereas in the US a gift in excess of $14,000 a year can mean that some of the $5.49m exemption is used up. Balancing these two sets of rules is important for efficient planning.

Gifts to a charity can be effective from an income tax and IHT perspective, but the recipient will need to be to a dual-qualified charity in order to ensure that this is tax efficient from both an income tax and IHT/Estate tax perspective in the US and the UK. Please do speak to the team that look after you about the best way to give, if you make charitable donations.

Non-UK domicile rules

The reforms to the non-UK domicile rules takes place from 6 April 2017, however now is a good time to consult with your advisor to see whether there are some income tax or inheritance tax planning before it’s too late. For some of our clients this could be the last time that you benefit from the remittance basis of taxation. One of the issues for long term resident non-UK domiciled individuals is that rather than pay the remittance basis charge, worldwide income could be reportable in the UK which could lead to increased compliance costs as well as taxation. Advice on restructuring of assets and remittance planning could be areas for consideration.

Offshore income gains

For those taxpayers who are paying, or who will be paying UK tax on their worldwide income and gains, you should be aware that when you invest in non-UK collective investment funds that do not have HMRC reporting status (e.g. US mutual funds) any gains made on the sale of such investments are charged to UK income tax (up to 45%) and not UK Capital Gains Tax. Any loss can be taken as a capital loss but cannot offset against income or Offshore Income Gains.

Similarly, US taxpayers should be aware that non-US collective investments can be caught by punitive PFIC rules. 

Foreign tax credits

We normally advise clients to consider making an upfront UK tax payment before 31 December in the calendar year they receive income or realise a gain where there has been no withholding tax or payment on account covering the UK tax liability. This applies to most clients who are on the “paid” basis for foreign tax credit purposes. For those clients on the “accrued” basis it can be good tax planning to time the income payments or capital transactions to take place within the start of the calendar year but before 6 April 2017. This is so that the UK tax accrues within the same US tax year for that item of income or gain, ensuring foreign tax credits are offset in the same US tax year that an item of income or gain is generated.

How we can help

Buzzacott's 50-strong 
Expatriate Tax Services team of dual-qualified US and UK tax advisors can guide you in making decisions that work in both the short- and long-term, while avoiding pitfalls and unexpected consequences.

For further guidance and advice tailored to your situation, please speak to your usual Buzzacott contact or:

Martin Scullion
Expatriate Tax Services    
T | +44 (0)20 7556 1207
E | scullionm@buzzacott.co.uk
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