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Last updated: 23 Feb 2022
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2021/22 UK tax year end planning for Americans in the UK

As we draw to the close of the current UK tax year, our Expatriate Tax Services team has pulled together the key tax points that Americans living in the UK should consider to minimise their global tax bill. 

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

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Annabel Poon

+44 (0)20 7710 0393
poona@buzzacott.co.uk
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Most US citizens and long-term residents (Green Card holders) living in the UK are subject to tax in both the US and the UK. Year-end tax planning is therefore something that has to be considered twice a year, in the battle to minimise global taxes. UK tax is usually higher than the equivalent US rate, but that’s not always the case and so it’s 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.

Spring Budget

Spring Forecast Statement

There are only a few days between the Spring Forecast Statement on 23 March 2022, and the end of the UK tax year on 5 April 2022, so you have a short window to consider whether any tax changes announced will affect your UK tax year end planning. The Chancellor will not make significant tax or spending announcements at the Spring Statement unless economic circumstances require him to. Last year, there was some expectation of a rise in Capital Gains Tax (CGT) rates but this never came to fruition. However, this could be revisited in the future so you should bear this in mind.

As a US person, you should also be aware of potential US tax changes in the future. Congress were unable to agree on a tax bill at the end of 2021 but we expect they will attempt to push some form of tax bill through some time this year. However, the longer the wait, the more likely that tax changes (if any) will be from 1 January 2023.

Opportunities before year end

Opportunities before year end

So what opportunities could you take advantage of in the run-up to the end of 2021/22? Below we’ve summarised a few for you to consider. Click the banners to view the opportunities and what you should do for each, and 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 often still 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.

You should take US advice in addition to UK advice, prior to making pension contributions, taking benefits or making a change to existing arrangements. With a number of changes to the pension tax rules over the years, it could also be beneficial to explore whether you are at the limit for maximum pension contributions, to utilise higher rate relief. 

For 2021/22, the income threshold at which the annual allowance begins to be tapered is £240,000. However, if you earn more than £312,000, the minimum annual allowance is £4,000. All pension contributions in excess of the annual allowance are subject to the annual allowance charge, which effectively claws back the tax relief. Utilising unused relief from earlier years could be useful as you are allowed to carry-over unused relief for three years.

If you are auto enrolled into a NEST pension by your employer, you should consider whether to ‘opt out’ if the reporting requirements in the US are too much in comparison to the value of the pension. The NEST pension is a trust-based plan, so depending on the level of contributions between the employer and the employee, there could be annual reporting requirements in the US if the NEST pension is considered a foreign grantor trust.

What should you do?

Review your existing pension arrangements to see whether you are maximising relief on pension contributions, and ensure you are not exceeding 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 are a higher (40%) or additional (45%) rate taxpayer, you are able to increase the relief by extending the basic rate band so that more income is taxed at lower rates.

US tax - The IRS has allowed more people to deduct charitable donations. Even if you do not itemise, you can deduct up to $300 in donations to qualifying charities each year.

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 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 itemised deductions.

What should you do?

Check the status of the charity to determine if it is US/UK dual qualified and keep receipts of your donations. If you are 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 any beneficial impact on the US liability but can be effective in reducing UK tax.

If you have excess foreign tax credits carried over from prior years, Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS) 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, Venture Capital Trusts (VCTs) and investments within ISAs, are often considered Passive Foreign Investment Companies (PFICs) for US tax purposes. We would not normally 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 so 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 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 utilise some of these excess credits.

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

If you qualify for Business Asset Disposal Relief (BAD relief), you will only pay 10% Capital Gains Tax (CGT) on all gains on qualifying assets in the UK.

There is no equivalent BAD relief in the US. However if you undertake careful planning from the outset which elects the business to be transparent for US tax purposes, this could potentially result in nil US CGT, and therefore retain the benefit of a 10% tax rate in the UK. If no planning is carried out, a gain would attract a US tax rate at 23.8%, being 20% long term CGT rate and 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 US Global Intangible Low-Taxed Income (GILTI) tax in place since 2018, US owners of foreign businesses should seek advice on how their position will be affected with any change in the UK Corporation Tax rate and allowances.

What should you do?

If you are 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 such as the GILTI tax, which may lead you to make an election for the company to be transparent, electing to be taxed as a US company, or using alternative tax mitigation techniques.

UK Inheritance Tax (IHT)

The figures below show that tax planning around UK IHT can save up to circa $9 million (for a married couple) if you are not yet fully subject to UK IHT, but might become so. 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 (2021/22) 40% £325,000 £650,000*
US Estate Tax (2022) 40% $12,060,000 $24,120,000

* the family home allowance may increase this threshold over time up to £1,000,000.

Planning with 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 between 2018 and 2025 (when the current estate/gift tax threshold expires) will not lose the 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 if 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 the 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 in order to ensure that this is tax efficient from both an Income Tax and IHT/Estate Tax perspective, in both the US and the UK. Also, 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, or potentially using a Donor Advised Fund that has a US/UK dual-qualified status.

In addition, if you are domiciled or deemed domiciled in the UK, you may want to avoid making a charitable contribution directly into a US charitable trust as depending on your circumstances, this could be deemed to be a chargeable lifetime transfer and potentially subject to an immediate 20% charge (if the 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 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 set-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 that do not have HMRC reporting status (e.g. US mutual funds), any gains made on the sale are charged to UK Income Tax (up to 45%, or 46% in Scotland) and not UK Capital Gains Tax (CGT) of 20%. Any loss can be taken as a capital loss but cannot be offset against income or Offshore Income Gains. Similarly, as a US taxpayer you should be aware that non-US collective investments can be caught by punitive PFIC rules.

What should you do?

Be aware that investments held in the US, such as US mutual funds, that do not have UK reporting status would be taxed at higher rates than the normal 20% CGT rate. Get in touch with our experts to discuss other 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, 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 2022. 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.

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 2022, so that the foreign tax credit matches up with the income or gains.

Foreign Capital Loss Election (FCLE)

If you formally claimed the remittance basis (i.e. 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, especially 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 made a remittance basis claim for the tax year 2017/18, you’re required to make the election by 5 April 2022.

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 other 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.

28 February 2022

Extended filing deadline for 2021/22 UK tax return

15 March 2022

Filing deadline for 2021 For 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.

18 April 2022

Individual income tax return filing deadline. Extension can also apply.

Deadline for payment of 2021 US tax liability.

First instalment of 2022 US estimated taxes due.

Foreign Bank Account Reports (FBAR)/FinCen Form 114 – these are automatically extended to 15 October 2022.

15 June 2022

Automatic two-month filing extension to 15 June 2022 applies to taxpayers living overseas.

Second instalment of 2022 US estimated taxes due.

31 July 2022

Second payment on account due for 2021/22.

15 September 2022

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

Third instalment of 2022 US estimated taxes due.

17 October 2022

Extended filing deadline for 2021 US tax return.

15 December 2022

Last possible extended filing date for 2021 Federal Income Tax Return (subject to IRS approval).

30 December 2022

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 2021/22 UK tax year.

31 December 2022

End of the 2022 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 2023

Final instalment of 2022 US estimated taxes due.

31 January 2023

2021/22 UK tax return electronic filing deadline.

Speak to an expert
Speak to an expert

We recommend that you seek professional advice where appropriate before taking any action. Our dual qualified US/UK tax experts have an intricate understanding of both systems. Fill out the form below and one of our specialists will be in touch to discuss how we can work together to assess your liabilities and minimise your 2021/22 global tax bill. 

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