Everfair Tax

Specialists in UK, US and Expatriate Tax.

What are Offshore Trusts and How Do Offshore Trusts work?

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Introduction and background to Offshore Trusts

Something we are frequently asked by clients is ‘what are the consequences of being a beneficiary of, and receiving, distributions from a family trust based outside the UK’.

Without review and planning, significant income and Capital Gains Tax (CGT) charges may arise, as such distributions could be allocated to accumulated income and capital gains within the Trust.

In the coming weeks, we will be posting a series of blogs about this complex, but relatively common issue.

To get things underway, we will start with a brief summary of the history of Offshore Trusts and an outline of their use for tax and succession planning.

A wide range of structures are available for families to hold their wealth, many of these being entities established outside the UK. UK tax law typically puts foreign entities into the following key categories:

  • Partnerships
  • Companies or,
  • Trusts

Companies are opaque and partnerships transparent, however Trusts are neither.

Instead, the UK tax system has a separate regime for how Trusts are taxed, including offshore trusts with a UK nexus.

Historically, many families have used Offshore Trusts as their structure of choice since they offer flexibility for both tax and succession planning, while also offering the potential for asset protection.

The principal UK taxes to be considered for Offshore Trusts are Income Tax, CGT and Inheritance Tax (IHT). Each needs to be considered separately. For example, a particular entity may be considered a settlement for IHT purposes, but may not be a settlement for either Income Tax or CGT purposes.

The taxation of Offshore Trusts in the UK has changed significantly over the years.

Some of the key changes affecting beneficiaries are:

1981: the introduction of a beneficiary CGT charge

2008: the extension of the beneficiary CGT charge to UK resident but non-domiciled beneficiaries

2017: the extension of deemed domicile status to income tax and CGT brought with it trust protections for settlor-interested trusts meaning certain income and gains could instead be beneficiary-taxed

There have also been key changes affecting trustees:

2006: more trusts brought within the charge to IHT

2015: the introduction of non-resident CGT for UK residential property

2019: the introduction of non-resident CGT for UK commercial property and UK property rich vehicles

The taxation of Trusts is also affected by the type of Trust. The two main types of trust are:

1. Discretionary: trustees have discretion over distribution of income and capital

2. Life interest: beneficiaries have a fixed entitlement to income but trustees may have discretion over distribution of capital

The UK tax system for Offshore Trusts can, however, be complex and so our series of blogs will demystify Offshore Trusts to show the benefits of using them to hold family wealth tax efficiently without falling into any ‘bear traps’.

Here are our 3 most important points for you to take away:

Trusts offer significant flexibility

Trusts are subject to a separate UK tax regime, which can be complex

The key taxes are Income Tax, Capital Gains Tax and Inheritance Tax

Written by Lawrence Adair

Moving to the UK – when do you pay tax?

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When do you pay tax when moving to the UK? Well, not only is it important, but it’s also extremely useful to be aware of your tax responsibilities and the allowances available to you in the UK and your home country. In this article, we briefly overview the rules about when do you pay tax when moving to the UK.

The UK Statutory Residence Test – The Three Types

This is where it all starts – identifying whether or not you can become a UK tax resident. It’s determined by what’s called the Statutory Residence Test.

The UK statutory residence test has three parts:

  • The automatic overseas residence tests
  • The automatic UK residence tests
  • The sufficient ties tests

If you meet any of the automatic UK resident tests, or are resident in accordance with the sufficient ties, the default position is that you are resident for the whole tax year.

What are the automatic UK resident tests?

They look at a combination of physical presence and relevant connections to the UK to determine whether you are considered to be a UK resident.

Split Year Tax Treatment (of your Split Year Provisions)

It’s important to bear in mind the UK tax year (running Apr – Apr). In specific circumstances, when you arrive in the UK, you are allowed to divide the UK tax year in which you arrive into two parts.

A. The part before arrival (non-resident) and;
B. The part following your arrival (resident)

These are known as the ‘split year provisions’. They are for those who are arriving in the UK, who are starting to have a home in the UK, starting a full time job in the UK or returning to the UK from working full time overseas.

Non-residents are only taxed on specific types of UK-source income. Sometimes non-residents are taxed on UK-source capital gains, whereas UK residents are potentially taxable on their worldwide income and their capital gains too.

What is Domiciled in the UK?

The extent to which you are required to pay UK tax on income and gains generated outside the UK, entirely depends on what is termed your ‘domicile status’. The concept of domicile is essentially where you consider your permanent or indefinite home to be. This can be:

The country of your birth, or;

Where your father considered his permanent or indefinite home to be during your childhood or;

Somewhere that you build a life and consider home as an adult

Domicile and Remittance Basis

If your domicile (the place you consider your permanent home) is not in the UK, then you can potentially claim the remittance basis. Claiming the remittance basis allows you to only pay tax on non-UK income and capital gains, to the extent that it is considered to be “remitted” (ergo received into) to the UK. The remittance basis can be claimed or not claimed each year, that’s your choice and dependent on your preferences and circumstances. It’s important to note that the annual cost of claiming the remittance basis increases, alongside the length of your residence in the UK.

  • < 7 years residence of previous 9 – loss of income tax allowance and capital gains tax exemption
  • 7 years of residence of previous 9 – loss of income tax allowance and capital gains tax exemption, +plus flat fee of £30,000
  • 12 years of residence out of the previous 14 year – loss of income tax allowance and capital gains tax exemption plus flat fee of £60,000
  • After 15 years of residence in the previous 20 years, the remittance basis can no longer be claimed

For non-UK domiciled individuals (i.e. those who don’t consider UK as their permanent home), the first three years of residence in the UK (including the year of arrival), can also bring an entitlement to tax relief. This tax relief is based on any proportion of salary which relates to the number of days spent working outside the UK. This first three years tax relief also depends on conditions being met, as to where the salary is paid and retaining an appropriate proportion of the salary outside the UK.

Monies that you had before becoming resident in the UK would be considered tax free. Therefore, to benefit from this and any claim to the remittance basis, it is important to structure your bank account properly. This is something a specialist can help you with.

Finally, it’s important to know that there is no uplift to market value on arrival in the UK in terms of the basis for assets for UK CGT purposes, if that asset is sold whilst you’re a UK-resident. The entire difference between the original purchase price and sale process would potentially be subject to tax.

If you have any specific questions about your tax responsibilities, we can answer those for you based on your specific circumstances. We can also work with you on an on-going basis to help you to always prepare well in advance.

Here are some further useful, reputable UK tax resources for you:

https://www.gov.uk/tax-come-to-uk
https://www.gov.uk/government/publications/rdr3-statutory-residence-test-srt/guidance-note-for-statutory-residence-test-srt-rdr3
https://www.gov.uk/hmrc-internal-manuals/residence-domicile-and-remittance-basis/rdrm10200
https://www.rossmartin.co.uk/overseas-residence/2357-split-year-treatment-toolkit

How do double taxation agreements work?

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A double taxation agreement is designed to do exactly what it says – prevent double taxation.

It is a treaty between two countries which sets out who gets the main right to charge tax on particular types of income and capital gains.

The other country to the treaty can still potentially charge tax on that income and gains but it would have to allow a credit from the tax that would usually be due for the tax already paid in the other country. Generally this means that you end up paying whichever is the higher of the tax due in the two countries.

Sometimes the agreement does specify that a particular type of income or gains is only taxable in one of the two countries, an example being pension income or a lump sum from a pension scheme in that country. However even then there is usually a part of the agreement that says when the income or gains is not subject to tax in the country with the main taxing rights for example through a claim to the remittance basis, then the other country can still charge tax as there is no double taxation.

US treaties also contain an extra specific carve out known as the savings clause allowing US citizens to be taxed as if the treaty did not exist in most cases. What this means that even if the treaty says the income is only taxable in the UK on a UK resident, it is also taxable in the US but the US would have to give credit for the UK tax due on the same amount. In that way double taxation is still avoided.

In the more unusual circumstances where an individual is considered resident for tax purposes in both countries then before the treaty can even be considered you will need to determine where the person is resident for this purpose. This is done using a four part test set out in the agreement and you go through the four tests in order, stopping when one of the tests is met. The tests include where you have a home, where you main social, family professional and economic ties are (known as the centre of vital interests), where you physically spend more of your time and which country you are a national of.

Double taxation agreements are very useful to avoid being taxed twice on the same income in two places but can be difficult to understand and need to be applied correctly to get the right outcome.

The UK in particular are looking more and more closely and claims to foreign tax credits to ensure they are allowable under the terms of the various double tax agreements they have entered into.

What it means to be domiciled for UK tax purposes

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The concept of domicile essentially means which country an individual ultimately considers to be their home and to which they will at some point return.

There are two main ways that an individual can establish a domicile.

The first is at their birth though the domicile of their parents although it is typically the domicile of the father which is considered here. This is known as the domicile of origin.

The other main way is through making a new country their home as an adult, known as a domicile of choice.

The domicile of origin is the stronger of the two domicile concepts and it is necessary to prove that a domicile of choice has been created to replace the domicile of origin. HMRC for example would need to prove that an individual who has his domicile of origin outside the UK has established a domicile of choice in the UK. An individual who had a UK domicile of origin would likewise need to prove that they have established a domicile of choice outside the UK. This is done by demonstrating the extent of ties to the country in which it is said a domicile of choice has been established and that ties to the country of origin have been broken.

So having established that you are a non UK domiciled individual, what are the benefits available to you?

The first benefit is being entitled to access the remittance basis of taxation. This means that non UK income and gains are only subject to tax if they are brought to or used in the UK by you or what is termed a relevant person which includes your spouse, co habiting partner and minor children. Whether to make a claim to the remittance basis is a decision which can be made each year when the tax return for that year is prepared.

The cost of claiming the remittance basis depends on the length of time you have been resident. For the first seven years the cost of the remittance basis is the loss of your tax free allowances for income and capital gains tax. After you have been resident for seven of the last nine years (including part years of residence) the cost increases to £30,000 per annum and after you have been resident for 12 out of the years the cost goes to £60,000 per annum.

Another benefit to being non UK domiciled is that for inheritance tax (IHT) you are only subject to IHT on UK based assets such as real estate, cash balances in UK accounts and UK registered shares. Gifts of non UK assets are also not subject to the seven year rule and are immediately outside your estate for IHT.

Once you have been resident in the UK for 15 of the last 20 years you become deemed domicile and the remittance basis and protection of your non UK assets for IHT are no longer available.

Planning is key to making the most of any opportunities presented by being non UK domiciled, especially ahead of increases in the cost of claiming the remittance basis and becoming deemed UK domiciled.

What to think about when considering estate planning in the UK

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What to think about when considering estate planning? Whilst tax is important, it should not be the driver for any estate planning. Instead, the starting point is how you would like to see your assets pass on your death and then the estate plan can achieve this as tax effectively as possible. Here, we’ll share the key considerations and what you should have prepared.

So, you’re thinking of your estate and planning to be as tax efficient as possible. What are the key considerations and steps?

Consideration 1: Estate Planning, Wills & Power of Attorney

Firstly, it’s key to have up to date wills and powers of attorney to make matters smooth and to ensure that all assets pass the way you would like. The last thing you want are for complications to arise around the intestacy rules. You want to feel assured in the knowledge that things are as straight-forward as possible for those administering the estate on your death.

Consideration 2: Estate Planning and Inheritance Tax

From a tax perspective, when thinking of an estate plan it’s important to establish the extent of the Inheritance Tax (IHT) liability. Most UK resident individuals (and even UK domiciled individuals who are resident outside the UK) are subject to IHT on their worldwide assets. However, those who are non UK domiciled and not deemed domiciled are only subject to IHT on their UK assets.

Consideration 3: Gifting during your lifetime

An estate plan can include gifts to be made during lifetime where this is appropriate and something you are comfortable with. This is particularly important as gifts during lifetime require giving up the assets and the right to receive any income that they generate. You would have to be comfortable that the beneficiaries are ready to receive the assets and that you are happy you would have enough remaining to meet your own needs.

Option: Estate Planning gifting to individuals

Where lifetime gifts are made to individuals, these fall outside the estate for IHT seven years after the gift is made. So, in other words… if you gift to an individual seven years prior to your death, the value of the gift given is not subject to IHT.

Why? Well, these are referred to as potentially exempt transfers or PETs. If the person who makes the gift passes within the seven years then the value of the gift forms part of their taxable estate on death, with the tax reducing if the gift has been survived by three years.

Option: Estate Planning with Trusts

Gifts to trusts during lifetime are known as chargeable lifetime transfers (CLT’s) and attract a potential 20% immediate IHT charge if over the tax exempt allowance for IHT known as the nil rate band, currently £325,000.

If you’re a non UK domiciled person, you’re able to make gifts from non UK assets without this being a potentially exempt transfer (subject to the seven year rule). So essentially, if you’re non UK domiciled and you gift £325,000+ in UK assets to a trust while you’re alive, the value of that gift will be subject to 20% IHT charge. Whereas if you’re non UK domiciled and were to gift to that trust from non UK assets, you can potentially avoid these gifts/assets being subject to tax.

What is being deemed Domiciled, and are exemptions available?

An individual becomes deemed domiciled after living in the UK for 15 years of the last 20. So, before an individual becomes deemed domiciled, it would be worth considering planning to minimise the IHT on non UK assets. This can include a trust, or other structures.

More generally, there are also a number of exemptions which it is worth being aware of and ensuring that you’ve edit from where possible.

Most people are quite familiar with the spousal exemption for example – this allows assets to pass between a married couple without IHT implications.

For a couple, where one is non UK domiciled and the other is UK domiciled, the spousal exemption would allow assets to pass from the UK domiciled spouse to the non UK domiciled spouse. This is limited to £325,000.

There is also a small annual gift exemption of £3,000, and gifts to a person when they are getting married.

Perhaps the other most valuable exemption, is gifts out of surplus income. You have surplus income if you have more income annually that you need in order to pay your usual living costs. So, gifts out of surplus income allows people to give away the remaining surplus balance, without it being a gift subject to the seven year rule. Such gifts must be made regularly, ideally at least every year.

We can support you with estate planning strategies and solutions

We’ve shared a few tax efficient strategies and there are far more, especially given the complex nature of your unique financial situation, personal circumstances. If you have any questions you require support with, or you’d like to have a one-to-one consultation, please do get in touch with us.

Tax when arriving in the UK

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The UK Statutory Residence Test, and other important things to know

For anyone arriving in the UK, a key piece of information is to understand the point at which they would be considered tax resident in the UK, and therefore when their liability to UK income and capital gains tax will begin.

You can read the full article now, or download the PDF version for free below.

Since 2013 the UK has had a more formal test included within its legislation to determine when an individual will become a resident in the UK for tax purposes.

It often takes those moving to the UK by surprise that tax residency is determined entirely independently from an individual’s immigration status.

UK Tax Residence & the Statutory Residence Test

The test for UK tax residence is known as the Statutory Residence Test (SRT). The SRT has three parts:

  1. Rules under which an individual will automatically be considered UK tax resident
  2. Rules under which they will automatically be considered non-UK resident and;
  3. Then an effective tie breaker test known as the Sufficient Ties Test.

When are you considered a UK Resident?

An individual will be considered automatically a UK resident if they spend more than 183 days in the UK, have their only or main home in the UK or work full time in the UK. The concept of having an ‘only’ or ‘main’ home in the UK, or ‘working full time in the UK’ are then defined further.

An individual who has not previously been a UK resident and is spending time in the UK for the first time, will automatically continue to be a non-UK resident if they spend 45 days or less in the UK or continue to have a full-time job outside the UK and spend 90 or fewer days in the UK with 30 or fewer of these being work days. Again, full-time work outside the UK and what counts as a work day for this purpose are further explained in the rules.

If an individual doesn’t meet either the automatic UK residence or non UK residence tests, then their residence status will be determined by the Sufficient Ties Test.

The Sufficient Ties Test looks at a balance of:

  • physical days of presence and
  • four relevant connections to the UK
    • being whether you have spent more than 90 days in the UK in either of the previous two tax years;
    • whether you have worked in the UK for more than 40 days in the tax year;
    • whether you have accommodation available to you in the UK and;
    • whether you have a spouse or minor child who is resident in the UK (known as the family tie)

As with the other tests, all these important concepts have further specific definitions which are included in the legislation and need to be considered.

Changes, given the Covid-19 Global Pandemic

In response to the current movement restrictions across the globe in the wake of the Coronavirus pandemic, HMRC have released additional SRT guidelines, to work in conjunction with their existing guidance for exceptional circumstances. Up to a total of 60 days in the UK which are considered to result from exceptional circumstances do not count for certain parts of the SRT.

The additional circumstances for COVID-19 that are being considered as exceptional are:

  • Quarantine or self-isolation from following public health guidance or advise from a health professional as a result of the virus
  • Advice not to travel from the UK by recommendation from the Government as a result of the COVID-19 virus
  • The inability to leave the UK as a result of international border closure
  • If your employer requests that you return to the UK temporarily as a result of the virus

Although individuals may by necessity have to remain unexpectedly in the UK, whether days spent in the UK can be disregarded due to exceptional circumstances will always depend on the facts and circumstances of each individual case.

This may be relevant to a number of people arriving in the UK to delay the date of their residence in the UK, or prevent them from being considered resident earlier than would otherwise be the case.

What are the Split Year Rules?

Generally, an individual is either resident or non-resident for the whole of a UK tax year. But in certain circumstances, known as the split year rules, it is possible to divide the UK tax year into two parts:

  1. one that is prior to the point at which the individual triggers the condition which made them UK resident and
  2. the part following that point

Where these rules apply, UK tax residence (and therefore liability to UK tax) only arises in the later part of the year.

The split year provisions generally apply in circumstances when an individual becomes resident because they have taken up a full-time job in the UK or are accompanying someone who has a full-time job in the UK or when someone acquires a home in the UK.

It is obviously very important to establish whether you are entitled to benefit from these rules on arrival in the UK, as this may also help line up your tax position in the UK with your tax position in the country you are moving from.

This can prevent problems arising, from being taxable for a period of time in both countries, and needing to rely on tax treaties to avoid double taxation.

Tax, for UK Residents

The UK operates a system of independent taxation, with individuals having their own residence status, having their own entitlement to annual allowances and each being responsible for any taxation in respect of their own income and capital gain.

This means that situations can arise where one spouse is resident and the other is not, especially where the move is for work reasons for one spouse, and there is children’s education to consider. This can be an advantage where it does occur and present more planning opportunities.

Tax, for non-UK Residents & Remittance

For an international individual, whose usual home is not in the UK (what is referred to as being non-UK domiciled under UK tax rules), they may be able to benefit from specific tax rules in respect of their non UK income and gains, known as the remittance basis. Under these rules, the foreign income and gains are only subject to UK tax if brought to or used in the UK.

Those non-domiciled individuals with jobs that still require them to work partly overseas after arriving in the UK, can also benefit from a further advantage under the remittance basis.

How does the Remittance Basis work?

Under what are known as ‘the overseas workdays relief rules’, non-uk domicilied individuals can pay tax on just the proportion of their salary which relates to UK working time. It just needs to be paid into a specific, non-UK bank account, and they must keep the proportion of their salary which relates to non UK working time outside the UK. This relief is available for the first three years of residence in the UK. There are detailed rules to follow when claiming this relief, so advice should be sought on an individual’s particular circumstances.

The cost of claiming the remittance basis increases over time with it just resulting in a loss of tax free allowances for the first seven years, then increasing to £30,000 per annum and to £60,000 after 12 years. After 15 years of residence, the remittance basis cannot be claimed.

All the rules outlined above count part years of residence in the time limits so timing of becoming resident in the UK can often be very important.

Another key point: to benefit fully from the remittance basis (and the fact that the UK will not tax amounts of money that an individual had accumulated before becoming UK resident…), it is important to have bank accounts set up correctly and plan in advance how you’ll pay for UK living costs as efficiently as possible. It also helps avoid what are known as the mixed fund rules that apply to accounts with different sources of income where you are considered to withdraw the least tax efficient amounts first.

Finally, it is worth being aware that there is no increase for capital gains tax in the value of assets to their market value at the date of arrival. Capital gains tax will potentially be due on increases in value, from the original purchase price and for foreign assets take exchange rate movements into account.

In summary, to make the most of your move to the UK, the old adage forewarned is forearmed rings true – advance preparation is crucial.

This is our area of technical expertise, so we’re proactive in seeking new regulation changes, and knowing what’s on the horizon. Everyone we work with has different goals. We honour your unique starting point, proudly offering a truly personal and adaptable service for you.

For advise and to see how we can add value to your move to the UK, please contact us at Everfair Tax.

UK Budget 2021 Tax Changes to be aware of

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We’re keeping you ahead of the latest UK 2021 Budget Changes, ensuring you have all information you need to prepare yourself and keep ahead. So, what were the announcement highlights from a tax perspective?

Against a backdrop of hope that it may be possible to resume a more normal way of living in the coming months and the need to stimulate the economy back into growth and protect jobs, the Chancellor of the Exchequer, Rishi Sunak, today set out his Budget.

After many differing views on what was likely to be announced, the first inkling of the likely direction of any changes was the report of the Treasury Committee issued on Monday and which strongly recommended that now was not the time for tax rises although it stated that it was clear this would be necessary in the longer term.

Some interesting UK Budget 2021 outcomes

They interestingly expressed the view that moderate increases in corporation tax could raise revenue without damaging growth and made the following recommendations:

  • UK Government should prioritise reforming stamp duty land tax;
  • Government should introduce a temporary three-year loss carry-back for trading losses and increase investment incentives for business;
  • Government should also set out a tax strategy for what it wants to achieve from the tax system and identify high level objectives.

With this in mind, it is perhaps no surprise that what we got in today’s announcement in terms of tax changes was as follows…

Increase in Corporation Tax Rates from April 2023

UK corporation tax is currently levied at a flat rate of 19%. However, the Chancellor announced in his Budget Speech that this would be increased effective from April 2023.

  • Under the proposals, corporation tax on profits in excess of £250,000 will be subject to tax at a rate of 25% from 1 April 2023
  • Profits of £50,000 or less will still be eligible for the existing 19% tax rate, and
  • Profits between £50,000 and £250,000 will be charged at tapered marginal rates

It is worth noting that close investment holding companies will be subject to the main rates regardless of profit levels.

Interestingly, for US citizens operating a business via a UK limited company treated as disregarded or as a partnership for US tax purposes, this increase in corporation tax might not be a significant concern (in fact, it might even help).

This is because of the way the US foreign tax credit system has operated since 2018, treating income derived from a foreign branch operation as falling within a different category to other earnings. This means that US citizens with carried forward foreign tax credits from, say, a former employment, cannot use those credits to offset the tax on their business operations.

By way of a very simplified example:

Let’s assume our American entrepreneur has elected to treat their UK company as a “disregarded entity” for US tax purposes, and that company is making a profit of £500,000.

  • Under the existing rules, the UK corporation tax due would be £95,000 (£500,000 @ 19%)
  • The individual entrepreneur would then pay US tax at a marginal rate of, say, 37% resulting in a US tax charge of £185,000, less credit of £95,000 for the corporation tax due
  • So, net US tax due of £90,000, and a total tax exposure of £185,000

Of course, that example £90,000 US tax bill would have to be paid by the entrepreneur personally, not by the company, so they might need to declare a dividend (subject to some more UK tax) in order to fund the US tax bill.

Under the proposed rules, assuming a 25% corporation tax rate, the UK corporation tax due would be £125,000, with the US tax due being £60,000 (i.e. £185,000 total exposure, less credit for the £125,000 corporation tax due).

Therefore, the total tax bill remains £185,000 (total exposure), but the amount of tax payable out of the entrepreneur’s personal bank account is now £60,000, not £90,000.

“Super-deduction”

In an attempt to stimulate investment by business, the Chancellor announced a “super-deduction”, available for two years from 1 April 2021. This super deduction applies to companies subject to UK corporation tax making an investment in ‘plant or machinery’ during the two-year window.

Where that investment would previously have been allowed as a deduction at a rate of 18% per annum on a reducing balance basis, a special 130% first year allowance will be allowed provided that certain criteria are met.

Where the investment would previously have qualified only for the special capital allowance rate of 6% per annum, the first year deduction will be allowed at 50%.

Personal Tax Changes from 2021

From a personal tax perspective there was:

  • a freeze on the personal allowance
  • higher rate bands
  • capital gains tax annual exemption
  • pensions lifetime allowance and
  • IHT exempt threshold at previously announced levels for 2021/22 until April 2026

Regarding IHT, as this is beyond the life of the current parliament and the next scheduled general

election whether the allowances remain frozen for that entire period will depend on any change in Government.

There were some minor amendments to holdover relief and the off-payroll working provisions, but neither make significant changes, nor ensure that the rules operate as intended. Possible changes to pensions relief, capital gains tax rates and inheritance tax did not materialise no double to the relief of many.

Other measures to be aware of

There was more money for IT for HMRC, and more money to combat fraud in connection with the various coronavirus support schemes.

There was also the announcement of Government guarantees on 95% mortgages to help the next generation get on the property ladder and reduce reliance on the “Bank of Mum and Dad” which no doubt will be welcomed by many!

In general the focus was clearly on encouraging and being careful not to take any steps which may harm economic growth and focus on reducing unemployment. Is this just a temporary postponement of the more significant tax changes previously being talked about to the Autumn Statement? Perhaps a slightly longer-term stay of execution may become clearer in the coming months.

In any case, we will be sure to share our expert insights and what this could mean for you. If you have any questions, please don’t hesitate to contact our team.

Takeover Confirmed: Revisiting the Biden Tax Policy Proposal 2021

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Here, we’re revisiting the Biden Tax Proposal, now that his administration takeover has been confirmed. How will it impact Capital Gains Tax, as well as Estate and Gift Tax.

If you’d like to read this later, you can download the PDF copy here:

Now that the US has a new president, there will inevitably be a lot of change for US citizens, both in the US and those living and working abroad.

With an evenly split senate, it may be easier for Biden to pass some of his proposed legislation that would have been impossible if there was a republican majority. Even a small majority in a vote can make life easier for him.

When reviewing the Biden taxes & policy change, two of the most pertinent changes could be those planned for Capital Gains Tax and Estate Planning.

Biden Tax Policy: Capital Gains Tax changes

Capital Gains Tax will change from a flat 20% to being taxed in line with income rates which are proposed to increase from 37% to 39.6% for the highest band (more than $400K).

It is unclear whether this increase in Capital Gains Tax includes the additional 3.8% tax applied to net investment income. If this is the case CGT could be as high as 43.4%.

However, there are some practical things you can do to reduce your Capital Gains Tax liabilities.

  • Long-term investments: If you hold stock for a long time you will pay less CGT so selling early may not be as beneficial as it seems.

This can also mean anything bought more than a year ago can be considered long-term so ensure you check the trade date of the purchase to sell at the most beneficial time.

  • Tax-deferred retirement plans – Investing in a retirement plan means you won’t have to pay immediate taxes. It is also possible to use this plan for investments which won’t be subject to CGT.
  • Offset gains with capital losses – Essentially if you sold two stocks – one at a loss and one at a gain – the loss of one can be offset against the gains of another therefore reducing the CGT owed.

Biden Tax Policy: Estate and Gift Tax increase

The Estate and Gift Tax rate will possibly increase from 40%-45% and the tax exemption rate will decrease from $11.58m to $3.5m and $1m for lifetime gift tax exemption.

Essentially this restores the levels back to those of 2009. There are, however, some ways of taking advantage of the allowances to reduce the tax owed.

  • Double-up – Married couples (or civil partnerships) have the same allowance each but by combining they are able to gift up to $30k of property tax free, per year.
  • Gifts to spouse – If your spouse is a US citizen all gifts are tax free, but if they are not a US citizen the limit of tax-free gifts is $157k.
  • Timing is everything – The gift allowance runs on the calendar year, and you are unable to carry over allowance from one year to another. However, you are able to spread a large gift over multiple years to reduce the gift tax due.
  • Gifts to children – Gifts can be left in trust to your children, but they must own it outright before they are 21 years old. If they are under 18 there has to be an adult to manage the property for them.

We’ve revisited Biden Taxes – so what next?

With the situation being so uncertain, it is likely you will be watching the development over the next few weeks with bated breath. Instead you could start the conversations and find out what your options are and how such changes could affect you.

If you think some of these tax changes could affect you, or you would like clarification, give us a call today and we will offer advice on what the best plan of action could be for you at this time.

Renouncing US Citizenship, Taxes & Cost Benefits

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Renouncing US citizenship when abroad, for example in the UK, has its benefits. The benefits to taxes and the general cost is something we’re often speaking to our clients about. For this reason, we thought we’d share our experience and advice in more detail for you here.

If you’d like to read this later, you can download the PDF copy here:

As the system currently stands, US citizens, and in many cases people holding a US “green card” have to file an annual income tax return with the IRS. This is regardless of where they are living and working.

This can be a costly and time-consuming exercise. But for those with no plans to move back to the US, the possibility of renouncing US citizenship might help. There a many attractive prospects and benefits to jumping off the US tax law carousel.

However, this is a decision that should not be taken lightly. There are many non-tax issues that should be considered before going ahead.

Although the US Embassy is currently closed due to Covid-19 restrictions, you could use this time to consider whether this would be the best financial and personal option for you.

Renouncing US citizenship in the UK – how do I do it?

When abroad, renouncing US citizenship is a relatively straightforward process. It is not necessary to engage an immigration lawyer to ensure that everything is done correctly. Although some people may wish to do so to give themselves some extra comfort.

When renouncing US citizenship, you must follow these steps and requirements

  • Complete the relevant forms prior to the appointment and gather all the relevant documents of proof of citizenship, name changes, divorce and marriage with you.
  • Submit the completed forms and copies of the required documents to the US Embassy by email.
    • If the Embassy is happy that these are in order, they will schedule an in-person appointment.
    • If the Embassy is not satisfied with the forms and documents provided, they will request changes to be made.
  • Have a passport proving citizenship of another country. Without a second passport citizenship cannot be renounced.
  • Complete a form with your last US tax return which includes a personal balance sheet (i.e. a schedule of all assets and liabilities).
  • Pay the renunciation cost of $2,350 USD.
  • As part of the process if you meet one of three criteria you may also be liable for an Exit Tax:
  1. If your average income tax liability over the past five years is more than the specified amount (for 2020 this was $171k, and is adjusted annually for inflation).
  2. If the aggregate net value of your global assets less global liabilities is in excess of $2m.
  3. If you fail to certify five years of tax compliance to the US.

If you meet any of these criteria you will be treated as if you disposed of all assets on the last day of your US citizenship and will be taxed according to the Capital Gains Tax requirements. In addition, you may be deemed to have received a full distribution from certain trust or deferred compensation arrangements (such as pension plans) of which you are a beneficiary. Finally, complex rules will apply that may result in a tax charge on future gifts or bequests to US persons.

However, there are some exemptions to the Exit Tax tests listed above. Firstly, some people born with dual nationality, and citizens under the age of 18.5 years old are exempt.

Similar rules apply to individuals who relinquish their lawful permanent residence (“green card”) status if they have held their green card for more than eight of the previous fifteen years, although the administrative process of relinquishing a green card is much less involved.

Pros and cons to renouncing US citizenship

With any potentially life-changing decisions there are pros and cons and these need to be considered very carefully.

Pros

  • Simplification of future tax reporting and liabilities.
  • No longer necessary to certify your status as a US citizen with financial institutions resulting in more flexibility around investments and potentially reduced banking or investment costs.
  • You only have to report to the US certain income which derives from sources within the US.
  • Any interest earned on deposits with US banks will be tax-free in the US.

Cons

  • The administrative cost as well as the Exit Tax provisions described above.
  • Renouncing your citizenship may make it more difficult to get a job in the US.
  • Unable to vote in US elections.
  • You may need a visa to visit the US for any purpose not covered by the ESTA program.

Renouncing US citizenship cost

  • You must pay the renunciation cost of $2400 USD
  • Further financial considerations and clauses are included above

Are you are considering renouncing your US citizenship to simplify your tax affairs? Why not give our team at Everfair a call and we can talk you through the process. Hearing your specific circumstance, we can share how it would benefit you and what else you should consider.

Inheritance Tax Rate and Capital Gains Tax UK Rate 2021 | Actions you can take:

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Following on from our recent blog, as promised, we’re sharing some actionable next steps for you regarding the potential changes to the Inheritance Tax Rate and also, Capital Gains Tax UK rate.

If you’d like to read this article later, download the PDF here:

We previously published an article regarding the potential changes to the Inheritance Tax Rate and also, Capital Gains Tax UK rate in 2021. This will be announced in the March budget. In preparation for that, this is a practical guide to what actions you can take to minimise the impact of any changes.

Of course, these changes are at present rumours and recommendations, and there is no confirmation about what will happen in March, but it never hurts to be prepared.

So, what are the next steps?

Capital Gains Tax Rate UK 2021

It has been suggested that income tax rates will be raised to as much as 45% and it is likely the CGT will increase to match it. To reduce your Capital Gains Tax bill here are some practical steps.

  1. Use your £12,300 allowance which cannot be carried forward to future years. A married couple can therefore raise £24,6000 a year with no CGT liabilities.
  2. Use your annual ISA allowance which currently sits at £20,000. All personal CG are tax-free if on ISA investments.
  3. Don’t sell assets later in life as this could mean that Capital Gains Tax will be due as well as Inheritance Tax.
  4. Consider setting up an all-in-one fund for multi-assets as the fund can sell holdings and therefore won’t be liable for CGT.
  5. Ensure any losses are offset against gains which can reduce the amount of CGT owed.
  6. Manage taxable income through pension contributions or charitable donations.

Inheritance Tax Rate 2021

The nil-rate band of £325k is likely to change in the March budget as well as changes to rules regarding unused pension pots. However, these practical steps could help you lower the amount of Inheritance Tax your beneficiaries will be liable for.

  1. You can leave everything to your spouse, or civil partner in your will without there being any Inheritance Tax. You are also able to pass on unused tax allowance to them.
  2. Give gifts whilst you are alive to loved ones. There are of course some caveats and if you’re not certain, give Everfair a call. But each person can give away £3000 of gifts each year without it being added to your estate. If you don’t use your allowance one year it carries over the next.
    1. Additionally, you can give £1,000 as marriage or civil partnership gifts which increases for grandchildren, great-grandchildren or your own children.
    2. You are also able to give random gifts of £250 to individuals as long as you have not gifted them something else in the same tax year.
  3. Leave part of your estate to charity as this means it will be exempt from Inheritance Tax. If this in turn brings your estate value to less than £325k then that will also be exempt.
  4. Write pensions and life insurance policies in trust. If this is the case then any pay-outs are not considered as part of your estate. Instead they will be passed to your beneficiaries and won’t be liable for Inheritance Tax.
  5. Bequeath your house to your children, stepchildren or grandchildren which will include an additional allowance of £175,000.

If you want help in regard to identifying which of these steps will be relevant to you and your situation as well as implementing any of them, please give us a call or email and one of our advisors will be very happy to share some practical, unbiased and professional advice.