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Last updated: 23 Feb 2021
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2020/21 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 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 Budget

There are only a few weeks between the Budget on 3 March, and the end of the UK tax year on 5 April 2021, so you have a short window to consider whether any tax changes announced will affect your UK tax year end planning. It’s expected that the government will announce an increase in tax rates to cover the deficit that has been created from the COVID-19 support packages. Keep an eye out for any tax changes announced on 3 March 2021 and whether this changes your tax planning before 6 April 2021. We will be revising this article in light of any announcements made on Budget day.

Opportunities before year end

Opportunities before year end

So what opportunities could you take advantage of in the run-up to the end of 2020/21? 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.

We usually suggest taking US tax advice in addition to UK advice, prior to making pension contributions, taking benefits or making a change to existing arrangements. In addition, with a number of changes to the pension tax rules over the years, it could be beneficial to explore whether you are at the limit for maximum pension contributions, to utilise higher rate relief. From 2020/21, the income threshold at which the annual allowance begins to be tapered was raised from £150,000 to £240,000, but the minimum annual allowance will be reduced from £10,000 to £4,000. 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 their limits.

Capital Gains Tax (CGT)

In the UK, the Office of Tax Simplification completed a report in response to the Chancellor’s request in July 2020, which suggested that Capital Gains Tax (CGT) rates should be ‘more closely aligned’ with Income Tax rates. The CGT rate, currently 20% (28% for disposal of residential property or carried interest), is likely to increase.  Although this could mean capital gains rates of up to 45%, we would expect the Chancellor to adopt a more measured approach to increasing capital gains tax rates. In addition, the report suggests the £12,300 annual exempt amount should be reduced to between £2,000 and £4,000. 

In the US, President Biden has previously proposed to eliminate the beneficial rate on capital gains and dividends where income exceeds $1million (a version of the “Buffet” rule). This could increase the rate of tax from the current 23.8% to 43.4%. We expect that any changes to that effect will take place for the 2022 calendar year. 

What should you do?

With both countries on the edge of increasing CGT, you should review your portfolio to see whether you should bring forward capital disposals. If you have an asset that requires a fair market valuation for tax purposes, get in touch with our Corporate Finance team for support.

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.

For individuals with 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 for 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 a taxpayer qualifies for Business Asset Disposal Relief (BAD relief), they will only pay 10% CGT tax on all gains on qualifying assets in the UK. There is no equivalent BAD relief in the US, however with planning in place an individual could make a ‘Check-the-Box’ election which could potentially result in nil US CGT therefore retaining the benefit of a 10% tax rate. 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 I 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 Inheritance Tax (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 (2020/21) 40% £325,000 £650,000*
US Estate Tax (2021) 40% $11,700,000 $23,400,000

* 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. Recently, 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 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 taxation..

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. Also, with changes in the US relating to itemised and standard deductions, it could be that clustering charitable contributions into certain years would be more effective, and/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 should avoid making a charitable contribution directly into a US charitable trust as 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 I 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 an advisor 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

For those taxpayers 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 are charged to UK Income Tax (up to 45%, or 46% in Scotland) and not UK Capital Gains Tax of 20%. Any loss can be taken as a capital loss but cannot be 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.

What should I do?

Americans living in the UK should 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% Capital Gains Tax rate. Get in touch with our experts to discuss other options for US/UK tax efficient investment.

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 2021. 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 I do?

Anyone who claims the accrued basis for foreign tax credit purposes should consider timing income payments or capital transactions to take place before 6 April 2021, so that the foreign tax credit matches up with the income or gains.

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 2020/21 global tax bill. 

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