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Last updated: 14 Mar 2024
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2023/24 UK tax year end planning for Americans in the UK

As the current UK tax year draws to a close, our US/UK tax experts have pulled together the key tax points that Americans living in the UK should consider in order to minimise their global tax bill. 

Most US citizens and US long-term residents (Green Card holders) living in the UK are subject to tax in both the UK and the US. Year end tax planning therefore needs to be considered twice a year in the battle to minimise global tax rates. UK taxes are usually higher than the equivalent US rate, but that’s not always the case and so it is worth seeking focused advice before taking any action.

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Rachael Kaye

+44 (0)20 7710 0398

Most US citizens and US long-term residents (Green Card holders) living in the UK are subject to tax in both the UK and the US. Year end tax planning therefore needs to be considered twice a year in the battle to minimise global tax rates. UK taxes are usually higher than the equivalent US rate, but that’s not always the case and so it is worth seeking focused advice before taking any action.

Tax year basis changes

Tax year basis changes

From the 2024/25 tax year, all unincorporated businesses must report to HMRC using the tax year basis. This means the period covering 6 April to the following 5 April, with 31 March year ends also allowable. For those with US partnership interests, who are used to converting and reporting their UK figures directly from their K-1, consideration will need to be given to how and when these US calendar year figures can be spliced together in order to adhere to the new UK reporting period. Moreover, individuals with overlap profits carried forward should speak to a tax professional in order to plan for the efficient utilisation of these from the transition year (2023/24) onwards. Click here for more detail on this change.

Spring Budget 2024

Spring Budget 2024

The 6 March 2024 Budget announced some major changes to the taxation of non-doms, however the changes are due to come into effect from 6 April 2025. Therefore, we expect most of the planning to happen during the 2024/25 UK tax year. There was a drop in the tax rate for the sale of residential property from 28% to 24%, so those selling residential property this month may want to take note should there be a Capital Gains Tax liability as the rate will be lower post 5 April 2024.

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Opportunities before year end

Opportunities before year end

So, what opportunities can you take advantage of before the end of 2023/24? We’ve summarised a few for you to consider below. Click the banners to view the opportunities and what you should do for each. Click the banner again to close that section.

Pension planning

While UK pension plans are not qualified for US tax purposes, UK pension planning can still be effective at reducing your global tax rate in the short and long term. Please note that particular care needs to be taken if cumulative employee contributions are likely to exceed cumulative employer contributions in the UK, or if pensions are moved or consolidated.

You should seek US advice, in addition to UK advice, prior to making pension contributions, taking benefits from a plan or making a change to an existing arrangement. With numerous changes to the tax rules regarding UK pensions over the years, it’s also recommended that you seek advice to explore whether you are at the limit for making pension contributions, whereby you can utilise higher rate tax relief. 

For 2023/24, the income threshold at which the annual allowance begins to be tapered is £260,000. If you earn more than £360,000, the annual allowance is capped at the minimum £10,000 (more than doubled from £4,000 in 2022/23). All pension contributions in excess of your annual allowance are subject to the annual allowance charge, which effectively claws back the tax relief available on pension contributions. Utilising any unused relief from the three previous years will be important for anybody who is caught by this.

If you are auto enrolled into a NEST pension by your employer, you should consider whether to ‘opt out’ if the US reporting requirements on this plan outweigh the value of the pension itself. The NEST pension is a trust-based plan and depending on the level of contributions between you and your employer, the NEST pension could be considered a Foreign Grantor Trust resulting in annual US reporting requirements.

Also note that the abolition of the pension lifetime allowance, announced in the 2023 Spring Budget, will take effect from 6 April 2024, with no lifetime allowance charge being in effect from 6 April 2023

What should you do?

Review your existing pension arrangements to check whether you are maximising your tax relief on pension contributions and ensure that you are not exceeding your limits.

Charitable contributions to dual qualified US and UK charities

A donation to a US/UK dual-qualified charity will relieve taxes in both jurisdictions.

Cash donation

UK tax - You will have the option to Gift Aid the donation so that the UK government tops up the donation by 25%. As long as you have paid enough UK tax to cover the Gift Aid, there will be no clawback. If you’re a higher (40%) or additional (45%) rate taxpayer, you also benefit by extending your basic rate band so that more of your income is taxed at a lower rate.

US tax - Only taxpayers who itemise their deductions will directly benefit from their charitable donations.

Asset donation

UK tax - If you donate assets other than cash, such as appreciated securities or real estate, you will not be subject to UK Capital Gains Tax (CGT) on the disposal. The market value of the land or shares donated to charity is deductible from your general income, providing tax relief of up to 45%.

US tax – You will not be subject to US CGT on the disposal. The market value of the land or shares donated to charity is taken into account as part of your itemised deductions.

What should you do?

Check the status of the charity to determine if it’s US/UK dual-qualified and keep the receipts relating to your donations. If you’re making significant donations, speak to our tax experts about setting up a dual-qualified Donor Advised Fund.

UK tax-efficient investments

UK tax-advantaged investments rarely have a beneficial impact on ones US tax liability but can still be utilised effectively by dual taxpayers.

If you have excess foreign tax credits carried over from prior years, Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS) investments can reduce your UK tax bill and also be an effective way to use up these excess foreign tax credits, which are carried forward but have a limited life of 10 years before they are wasted.

Be aware that Venture Capital Trusts (VCTs) and investments commonly found in ISAs are often considered Passive Foreign Investment Companies (PFICs) for US tax purposes. We do not recommend them if you’re a US taxpayer because PFICs are subject to US anti-avoidance rules that make them tax inefficient.

Cash ISAs are not PFICs, the interest they earn is simply taxed at US income tax rates plus the Net Investment Income Tax (NIIT) when due. In some cases, it will be possible to find funds for an ISA that are not PFICs, but the investment options are more restrictive.

What should you do?

Review your excess foreign tax credit position and determine whether EIS/SEIS investments could help be used to utilise some of these excess credits.

Business Asset Disposal Relief (formally known as Entrepreneurs’ Relief)

If you qualify for Business Asset Disposal (BAD) relief, you will only pay 10% Capital Gains Tax (CGT) on all gains on qualifying assets in the UK, limited to £1million of gains in a lifetime.

There is no equivalent BAD relief in the US. However, if you undertake careful planning from the outset, whereby you elect for the business to be treated as transparent for US tax purposes, you can obtain a nil US Capital Gains Tax (CGT) position and therefore retain the benefit of a 10% tax rate in the UK, limited to gains of up to £1million in a lifetime.

Conversely, if no planning is carried out, any gain would attract a US tax rate of 23.8%, being 20% long term CGT plus 3.8% Net Investment Income Tax (NIIT). Please note that 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.

With the US Global Intangible Low-Taxed Income (GILTI) tax in place since 2018, US owners of foreign businesses should seek advice on how their position is affected by the UK corporation tax rates, which include the main rate on companies with profits over £250,000 being set at 25%.

What should you do?

If you’re a US owner of a foreign business, you should consider the implications that the 2018 US tax reform has on your global tax bill. There are some additional tax considerations now, such as the GILTI tax, which may make it necessary for you to consider elections that would mean the company is treated as transparent or treated as a US company. There are also a number of other tax mitigation techniques in this realm to consider.

UK Inheritance Tax (IHT)

The figures below show that tax planning around UK IHT can save you up to circa $10million (for a married couple) if you’re not yet fully subject to UK IHT but might become fully subject to UK IHT. Here are the key differences with the UK and US estate tax regimes:

Tax regime Tax rate Estate threshold Threshold for a married couple
UK IHT (2023/24) 40% £325,000 £650,000*
US Estate Tax (2024) 40% $13,610,000 $27,220,000

* the family home allowance may increase this threshold over time up to £1million.

Planning involving trusts to mitigate UK IHT can work effectively for a US taxpayer. Large gifts can be made into an excluded property trust before an individual becomes deemed domiciled. Final regulations have been issued in the US confirming that large gifts made between 2018 and 2025 (when the current estate/gift tax threshold expires) will not lose their tax benefit once the threshold decreases after 2025.

It’s important to consider the Income Tax and Capital Gains Tax (CGT) rules in the US and UK when setting up an excluded property trust, to ensure there is no double taxation. For instance, it might be a good idea in some cases to taint the trust, so that it loses its protected status for UK tax purposes, in order to avoid paying double tax.

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 to ensure that this is tax efficient, in both the US and the UK. Furthermore, with changes in the US relating to itemised and standard deductions, it could be that clustering charitable contributions into certain tax years would be more effective. You may also consider using a Donor Advised Fund that has a US/UK dual-qualified status.

Moreover, if you’re domiciled or deemed domiciled in the UK, you may want to avoid making a charitable contribution directly into a US charitable trust because, depending on your circumstances, this could be a chargeable lifetime transfer and potentially subject to an immediate 20% charge (if your nil rate band has been used up).

What should you do?

If you’re a US person in the UK who is considering making gifts or looking to reduce your exposure to UK Inheritance Tax, you should consult with our specialist tax advisers to help you set up the right plan, whether it be tax efficient gifting from a US/UK perspective or the setting-up of an excluded property trust.

Offshore Income Gains

If you’ll be paying UK tax on your worldwide income and gains, you should be aware that when you invest in non-UK collective investment funds (e.g. US mutual funds) that do not have HMRC reporting status, any gains made on the sale are charged to UK Income Tax (up to 45%) and not UK Capital Gains Tax (CGT) at 20%. Also, any loss on such an investment will be treated as a capital loss and cannot be offset against income or Offshore Income Gains. As a US taxpayer, you should be aware that non-US collective investments can be caught by the punitive PFIC regime.

What should you do?

Be aware that investments held in the US, such as US mutual funds, that do not have UK reporting status could be taxed at rates higher than the normal 10-20% CGT rate. Get in touch with our experts to discuss the options for US/UK tax efficient investments.

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, when there has been no withholding tax or payment on account covering the relevant 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 efficient tax planning to time your income payments or capital transactions to take place at the start of the calendar year and before 6 April 2024. This is so that the UK tax accrues in the same US tax year for that item of income or gain, thereby ensuring the foreign tax credits are offset in the same US tax year that an item of income or gain is generated.

What should you do?

If you claim the accrued basis for foreign tax credit purposes, you should consider timing income payments or capital transactions to take place before 6 April 2024, so that the foreign tax credit matches up with when the income or gain is declared.

Foreign Capital Loss Election (FCLE)

If you formally claimed the remittance basis (i.e. when you had more than £2,000 of foreign income and gains), you should review whether you should make a FCLE. By making a FCLE, you elect to claim relief for foreign capital losses for tax years prior to becoming UK domiciled or deemed UK domiciled. However, the position needs to be carefully reviewed to see if the election is worthwhile, as it is irrevocable. The FCLE must be made within four years of the end of the tax year in which the remittance basis is first claimed after 2007/08. So, if you first made a remittance basis claim for the tax year 2019/20, you’re required to make the election by 5 April 2024.

What should you do?

Review your prior year UK tax returns to see if you have formally claimed the remittance basis and make your tax adviser aware of your portfolio of investments.

Key deadlines

Key deadlines

There are a number of upcoming deadlines that you may need to be aware of, but here are some of the key US and UK tax deadlines to consider over the next few months:

15 March 2024

Filing deadline for 2023 Form 3520-A (Annual Information Return of Foreign Trust with US Owner). If US owner filed on behalf of the trustee a substitute form 3520-A should be filed with their individual Income Tax return.

15 April 2024

Individual Income Tax return filing deadline. Extension can also apply.

Deadline for payment of 2023 US tax liability.

First instalment of 2024 US estimated taxes due.

Foreign Bank Account Reports (FBAR)/FinCen Form 114 – these are automatically extended to 15 October 2024.

17 June 2024

Automatic two-month filing extension to 17 June 2024 applies to taxpayers living overseas.

Second instalment of 2024 US estimated taxes due.

31 July 2024

Second payment on account due for 2023/24.

16 September 2024

Extending filing deadline for Form 3520-A (Annual Information Return of Foreign Trust with US Owner).

Third instalment of 2024 US estimated taxes due.

15 October 2024

Extended filing deadline for 2022 US tax return.

16 December 2024

Last possible extended filing date for 2022 Federal Income Tax Return (subject to IRS approval).

30 December 2024

If you have UK tax liabilities of less than £3,000, you can electronically file your tax return by this date and request that the tax be collected via a PAYE coding adjustment for the 2023/24 UK tax year.

31 December 2024

End of the 2024 US tax year. This is the deadline for implementing any US tax year end planning, such as making an upfront UK tax payment.

15 January 2025

Final instalment of 2024 US estimated taxes due.

31 January 2025

2023/24 UK tax return electronic filing deadline.

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