THE TRANSATLANTIC MAGAZINE
THE TRANSATLANTIC MAGAZINE
As we are fast approaching the 5 April 2022 fiscal year end, now is a good time to consider your circumstances for general year-end tax planning for UK purposes, whilst taking into account the impact for US tax. Particularly of note are certain milestones for American non-UK domiciled individuals.
In addition, I have included various other items that you may wish to consider as part of your tax optimisation strategy. Please note as a US person you must consider the US tax position for each of the below items to ensure that it is effective for UK and US tax purposes. The ideas detailed below are all ones that a US person can benefit from under the right circumstances.
Note that some of these topics are complex, the purpose of this content is to provide a background of the relevant topics and to prompt discussions where required.
Non-UK domiciled individuals may elect to be taxed in the UK on the remittance basis – this protects foreign income against UK income and capital gains tax to the extent that this remains offshore and is not brought to the UK.
For the first seven years of UK residence there is no charge for the use of the remittance basis, however after this a fee of £30,000 is levied. When you have been resident for twelve of the previous fourteen years this fee is then increased to £60,000 and when you are UK resident for the last fifteen out of twenty years you are no longer able to claim the remittance basis.
Once you have been resident in the UK for the previous fifteen out of twenty years you are considered deemed domiciled in the UK for income tax, capital gains tax and inheritance tax. It is therefore important to consider any planning that can be beneficial. Note that part years count as full tax years for this purpose.
Example 1 - Resident 7 out of the last 9 years
"A" arrived in the UK in the tax year ended 5 April 2016 (the 2015/16 tax year),"A" will have been UK resident for 7 out of the last 9 years as of 06 April 2022 and will need to pay the £30k remittance basis charge in order to claim the remittance basis for the tax year 2022/23.
Example 2 - Resident 12 out of the last 14 years
"B" arrived in the UK in the tax year ended 5 April 2011 (the 2010/11 tax year),"B" will have been UK resident for 12 out of the last 14 years as of 06 April 2022 and will need to pay the £60k remittance basis charge in order to claim the remittance basis for the tax year 2022/23.
Actions for Examples 1 & 2 – Review foreign income to assess whether the remittance basis is still favourable. Review offshore assets for UK compliance.
Example 3 - Deemed Domiciled
"C" arrived in the UK in the tax year ended 5 April 2008 (the 2007/08 tax year), "C" will have been UK resident for 15 out of the last 20 years as of April 6 2022 and will become deemed domiciled for Income, Capital gains and Inheritance tax in the UK for the 2022/23 year onwards.
Actions for example 3 – Review inheritance tax position before deemed domicile status comes into effect. Review offshore assets for UK compliance.
Excluded property trusts can provide effective tax planning for individuals approaching deemed domicile status. The key features being:
If this is something that you would like to consider I would advise you seek tax advice as soon as possible, as typically at least one month lead time is required to consider and establish such one.
Non-UK Domiciled individuals need to take care when remitting overseas funds to the UK. Business investment relief allows individuals to make a non-taxable remittance to the UK for the purpose of making a qualifying investment in a UK company. Some highlights are that:
Many individuals utilise pensions as part of their overall tax planning strategy. At the end of the UK tax year, it is worth reviewing your pension contributions for the year and consider any optimisation as well as ensure you have not overstepped the mark, especially since HMRC have drastically reduced the amounts that are relievable for tax for higher earners. Some of the key things to note are as follows:
I would advise that you should review your position to avoid any pitfalls and optimise where necessary.
If you are approaching 7 years or 15 Tax years since you arrived in the UK, the remittance basis of taxation may not be the most efficient option or no longer available after 15 years. This means that your non-UK income may be brought into the scope of UK taxation. This can lead to very negative tax Implications for UK tax purposes, if you have not reviewed your investment portfolio and taken any relevant action. Some keys issues to note:
It is essential that you review your portfolio, especially if you are nearing the end of the 7 year or 15 tax year window.
UK Inheritance Tax (IHT) is assessed on the estate of a deceased individual as well as certain gifts you make whilst you are alive, however, Domicile status can have a significant impact on the exposure to UK Inheritance Tax.
The US estate and gift tax system works in a different way, providing each individual a Lifetime allowance of $12.06m(2022) which can be used at death, although is reduced for taxable lifetime gifts. The annual tax-free gift exclusion per donee is $16,000(2022).
Both systems need to be navigated to ensure effective planning, however with the generous US lifetime allowance there may be no tax liability of a gift for US purposes, however there are certain filing requirements if a US person makes a gift of more than $16k or receives a gift from a non-US person.
A family investment company (FIC) is a private limited company which is used as a long-term investment vehicle. It Can provide an effective way to shelter income and assets from higher rates of taxation and Inheritance Tax. Some of the key benefits of an FIC are as follows:
Before an FIC is implemented, one must carefully consider if it is an appropriate strategy for you and your family's long-term circumstances. I would advise that before implementing such a strategy you must seek tax and possibly legal advice.
Excess FTCs arise due to the fact UK tax rates are higher that US tax rates, a US person is able to carry these excess credits forward for a period of 10 years. These excess credits can be useful in a number of scenarios, not limited to the opportunities raised in this article.
In conjunction with much of the planning detailed above and below, a review of your excess FTCs must be carried out to understand the impact from both a UK and US tax perspective.
For example, you may generate a UK tax refund by making an EIS investment, however you could be in scenario where you have to pay some or all of the refund back to the IRS, due to a lack of UK tax paid that year or excess FTCs.
If you are interested in further tax planning, then the following tax-efficient investments are also available. If you are considering any tax planning opportunities for the future, please get in touch. We have provided an overview below but please note that there are qualifying conditions and limits on these investments. In addition, clients that are US citizens will need further considerations including a review of their excess FTC position.
Please note for each of the below opportunities, a US person must ensure that the investment or underlying investment does not constitute an investment in a Passive foreign investment company (PFIC), which can lead to very negative tax consequences for US tax purposes.
Nomaan Ilyas is Managing Director of Frontier Group, a firm of advisers specialising in US, UK and International Tax return preparation services and advice. You can contact him on 020 7332 2843, n.ilyas@frontier-fs.com, www.frontier-fs.com.
