US AND UK TAX YEAR END PLANNING · Whilst tax planning is not only to be considered leading up to...

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US AND UK TAX YEAR END PLANNING

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CONTENTS

ACCELERATING PAYMENT OF NON-US TAXES 1

UK TAXES INTERACTION (ONLY RELEVANT IF YOU PAY UK INCOME TAXES) 2

CAPITAL GAINS AND LOSSES 5

IMPACT OF US TAX REFORMS 6

RESIDENCY 6

OWNERSHIP OF ASSETS AND GIFT AND ESTATE PLANNING 7

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Whilst tax planning is not only to be considered leading up to year-end, it is often a perfect time to review your tax affairs and ensure they are in order and optimised where appropriate. With the end of the US 2018 calendar year only weeks away, and the end of the UK 2018/19 fiscal year not far behind, we have summarised several broad planning ideas relevant for individuals needing to consider both US and UK tax rules. We recommend taxpayers having to deal with the complexity of two or more tax jurisdictions, i.e. US taxpayers living overseas, to take specific advice on the items raised below as there is no one size fits all approach. For US individuals with interests in foreign corporation the changes introduced as part of the ‘tax reform’ process mean that there is an even greater level of complexity to consider.

ACCELERATING PAYMENT OF NON-US TAXES

It may be useful to pay UK tax otherwise due by 31 January 2019 before 31 December 2018 to maximise foreign tax credits available to offset against your US income tax liability.

• As is always the case, if you realised significant capital gains or investment income (including carried interest) since 6 April 2018, the position should be reviewed to determine if a payment should be made by 31 December 2018 in respect to those items.

• Where an accelerated UK tax payment might not have been necessary in prior years, for example, if you had existing excess foreign tax credit carryovers, for 2018 additional foreign tax credit “baskets” have been introduced and which need to be considered. Previously you might have only considered the General and Passive baskets (General essentially being for earned or high taxed income, and Passive essentially being for low taxed investment income and gains); for 2018 the additional baskets are for foreign branch income and for shareholders in 10% or more owned foreign corporations. If either of these are relevant to your situation it advisable that you discuss this area with your Frank Hirth advisor.

• It may also be advantageous to advance UK corporate taxes and other foreign taxes.

US AND UK YEAR END PLANNING

www.frankhirth.com | t: +44 (0) 207 7833 3500 | [email protected]

This document has been written for the general interest of our clients and contacts to stimulate further thought and enquiry. It does not contain answers to specific situations and it is therefore essential to treat it as a prompt to take specific advice on any real and particular issues. We believe that the facts as summarised in this document are correct as at the time of going to press in November 2018. If we discover that the document might be read in a way that conveys a misleading impression (whether by tone, content, error or omission) we will make the necessary changes and draw attention to what has been changed once we become aware of the need to do so. We will not be responsible for any action taken by a reader who relies on the document but does not seek further advice to answer any specific query. Frank Hirth PLC Registered in England and Wales: Number 03945095. © 2018 Frank Hirth

Frank Hirth PLC London | Frank Hirth LLC New York | Frank Hirth LTD Wellington

IN THIS REPORT WE HAVE SUMMARISED BROAD PLANNING IDEAS RELEVANT FOR INDIVIDUALS NEEDING TO CONDIDER BOTH US AND UK TAX RULES.

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WE CAN ASSIST WITH DETERMINING THE TAX TREATMENTS OF EIS, SEIS INVESTMENTS.

THE MIXED FUND CLEANSING OPPORTUNITY CLOSES 5 APRIL 2019.

UK TAXES INTERACTION (ONLY RELEVANT IF YOU PAY UK INCOME TAXES)

1. On the basis UK tax is often higher than US tax, it might be worth considering taking steps to reduce your UK liability, and thus your worldwide tax exposure, where possible with charitable giving, EIS or SEIS investment and or pension contributions.

i. Dual qualified charitable contributions made by 31 December 2018 and before filing your UK tax return can be claimed on your 2018 US return as well as being carried back to your UK return for 2017/18 or claimed in 2018/19 if more beneficial. Offshore funds could potentially be used for this purpose without triggering a taxable remittance.

ii. We cannot provide financial advice and there are obvious risks associated with EIS SEIS investments, however we can assist with determining the tax treatment of these investments. For US persons considering these investments some caution should be taken as there is a theoretical risk for such entities to be considered PFICs; whilst this is unlikely due to need for the entities to be trading it can in theory apply due to the nuances of the PFIC rules.

iii. Highly paid individuals continue to face restrictions on contributions to their UK pensions. Taxpayers should review the impact of the tapered annual allowance on current year contributions and consider unused allowances from prior years. We cannot provide financial advice but can assist with determining the tax treatment of plan contributions, rollovers, Roth IRA conversions, and other matters.

It is also worth being reminded for US pensions that Roth IRA plans have a favourable US tax status and the benefits are mirrored in the UK by application of the US/UK income tax treaty. Taxpayers considering conversions to Roth IRA plans and new contributions should consider this before 31 December 2018 and whether action should be accelerated or delayed, taking note that it is only possible to do one IRA-to-IRA rollover per year.

2. If you require a source of funds in the UK but are restricted by the remittance basis rules, you have a short window to take advantage of the “mixed fund cleansing” opportunity, under which certain taxpayers are able to segregate a mixed fund into its component parts. The window of opportunity which began 6 April 2017 closes 5 April 2019. Please contact us for further guidance as there are many exceptions, please also note that this often requires complex analysis of your financial accounts and is usually a significant undertaking, therefore we would need sufficient time to ensure the necessary analysis and transactions take place before the window closes. Please notify us by 24th December if you would like our assistance in helping with any analysis.




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3. If you have been resident in the UK for more than 7 out of the prior 9 years you will be subject to the remittance basis charge of £30,000 if you wish to continue to claim the remittance basis of taxation. Furthermore, if you have been resident in the UK for more than 12 out of the prior 14 years you will be subject to the remittance basis charge of £60,000 if you wish to continue to claim the remittance basis of taxation. If either of these are to apply to you from 6 April 2019 and you will no longer claim the remittance basis of taxation, and will begin to report your worldwide income and gains to the UK, there is only a short window of time to set your affairs in order, and we would recommend the following:

i. Review whether your investments are efficient from a UK tax perspective. Non-UK fund investments without UK reporting status, municipal bonds, highly leveraged investments, S corporation and LLC ownership, and investments with high external management costs, will all have a significantly increased UK tax burden compared to the US regime.

ii. Restrictions on interest deductions on residential lettings for UK tax purposes

affect onshore and offshore properties, increasing further the differences between the taxation of such activities in the US and UK. Paying down mortgages may be a suitable strategy to mitigate the income tax effect of the changes (although paying down non-US dollar debt can have its own surprising US tax consequences and might also have UK IHT implications). Taxpayers may wish to consider whether to hold property in a corporate structure where interest is not similarly restricted.

iii. You may wish to recognise transactions offshore, this should be viewed in

conjunction with the US tax position of the transaction.

4. If you have been resident in the UK during 15 of the prior 20 years you will be considered “deemed domicile” for all UK taxes, meaning you will be subject to worldwide taxation in the UK. If you will become deemed domiciled from 6 April 2019 there is only a short window of time to set your affairs in order, and we would recommend the following as well as points 3 i. ii. & iii. above:

i. Consider setting up an excluded property and/or protected trust

ii. Review the UK tax impact of any existing trusts




A PROTECTED TRUST CAN PROVE USEFUL FOR THOSE WHO NO LONGER WISH TO PAY THE UK REMMITANCE BASIS CHARGE.

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Please note that a protected trust may be useful not just for those who are about to become deemed domiciled but also those who know longer wish to pay (or for whom it is no longer efficient to pay) the UK remittance basis charge. We recommend that the process of establishing and structuring a trust not be rushed and if a new trust is needed before 6 April that the process begin prior to 31 December.

5. As with the past two years, UK taxation of carried interest could create a 28% tax on ‘gains’ arising in the calendar year. There could be a temporary double tax if UK tax due is not paid by 31 December 2018 on ‘gains’ arising in calendar 2018. If you are unsure if you are affected, it is vital to contact the tax department of the relevant partnership or business as soon as possible to confirm the level of carried interest that has arisen to you from a UK tax perspective. Please then discuss with your usual Frank Hirth adviser prior to 31 December 2018.

6. If you have investments that produce Offshore Income Gains (OIGs) within a Trust you will want to discuss this with your tax advisor as a matter of some urgency. For US taxpayer an advanced UK tax payment may be recommended.




UK TAXATION OF CARRIED INTEREST COULD CREATE A 28% TAX ON ‘GAINS’ ARISING IN THE CALENDAR YEAR.

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CAPITAL GAINS AND LOSSES

If you anticipate your personal tax position changing between 2018 and 2019, this may affect when you may wish to defer or accelerate transactions. For example. if you have recognised a significant capital gain this year you may wish to recognise capital losses this year, if available to you and you do not have capital losses carrying forward. The netting of capital gains and losses is complex, especially for international taxpayers, and you need to consider the following:

i. Capital losses for US and UK purposes can only be carried forward, thus realising capital gains in 2018 and losses in 2019 is not as useful as realising them in the same year. Please be reminded that losses in one jurisdiction may create gains in another due to foreign exchange issues.

A. US rules generally require a First In First Out (FIFO) method of calculating gains and losses, whereas UK rules require “share pooling” to determine the relevant cost basis.

ii. It is important to be aware of where your primary tax will be on capital transactions; this depends on many factors.

iii. Understanding if your assets will receive capital gain treatment, or a more punitive tax treatment in either the US or the UK?

A. For US purposes the Passive Foreign Investment Company (PFIC) regime causes non-US fund investment gains to be taxed at the highest ordinary income rates looking back over the entire ownership of the fund. The US rate reduction in 2018 to 37% will therefore only impact a portion of any post 2017 gain. Selling when the dollar is strong may be advisable.

B. For UK purposes the offshore non-reporting fund investments may cause gains to be taxed at rates of up to 45% although some taxpayers can benefit from re-basing. A large proportion of US mutual funds are classified in this way.

C. In both jurisdictions’ losses from offshore fund investments also have special rules and may not be offset in the way you would expect.

iv. You need to consider whether or not you are you able to claim offshore losses from a UK perspective.

v. You need to consider whether or not you will be eligible for re-basing of your assets for UK purposes.




IT IS IMPORTANT TO BE AWARE OF WHERE YOUR PRIMARY TAX WILL BE ON CAPITAL TRANSACTIONS.

YOU NEED TO CONSIDER WHETHER YOU ARE ABLE TO CLAIM OFFSHORE LOSSES FROM A UK PERSPECTIVE.

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IMPACT OF US TAX REFORMS

As you will likely be aware this year has seen the implementation of the Tax Cuts and Jobs Act, which, as well as reducing the top rate of income tax from 39.6% to 37%, gave rise to significant tax changes in the US.

A. If you have had profits subjected to the repatriation tax (AKA Transition Tax) in 2017, you may want to consider taking dividends and pay foreign tax on this before the end of the calendar year to effectively “frank” the repatriation tax suffered in 2017. This links in with the accelerating payment of foreign taxes (discussed above). New IRS regulations have just been released and you may wish to discuss the impact of these with your Frank Hirth advisor.

B. If you are a US shareholder of a complex foreign structure you may want to review the structure before the end of 2018 to ensure you understand the make-up of all the underlying entities and determine whether or not the GILTI provisions apply to any of the entities. As above consideration should be made to paying a dividend and advancing a foreign tax on this prior to 31 December so to provide foreign tax credits which can be used to ‘frank’ the GILTI tax liability. New IRS regulations have just been released and you may wish to discuss the impact of these with your Frank Hirth advisor.

C. Numerous itemised deductions have been removed or limited for 2018 onwards following the US tax reforms, removing a lot of potential deduction planning; for example, if you are used to paying your 4th quarter estimated state tax liability before the tax year end this is likely no longer necessary as there is a limit of $10,000 ($5,000 if married filing separately) applied to the state, local and property taxes for the 2018 tax year.

RESIDENCY

A. If you are contemplating a change in residency this is an optimal time for planning, whether you are moving from one state to another or one country to another.

B. Accumulating years of UK residency limits the relief you and your family can claim under the remittance basis of taxation if non-domiciled. Be aware of the points at which your circumstances change and ask for our help in planning ahead.

C. Continuing to hold a US green card when no longer needed can create tax issues upon relinquishing the card later, as there is a potential expatriation exit charge when held for 8 out of 15 years. Be mindful of changes triggered by the passage of time. Taxpayers may wish to take advice as to whether there would be any advantage in surrendering the green card this calendar year.




TAX CUTS AND JOBS ACT REDUCED THE TOP RATE OF INCOME TAX FROM 39.6% TO 37%.

IF YOU ARE CONTEMPLATING A CHANGE IN RESIDENCY THIS IS AN OPTIMAL TIME FOR PLANNING.

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OWNERSHIP OF ASSETS AND GIFT AND ESTATE PLANNING

A. Gifts from US citizens/residents to others have annual exempt limits which you may wish to use before the year is over, subject to your overall integrated estate and gift strategy.

B. Are your family assets owned in a way which suits your longer-term needs and your income tax profile?

C. Given the large exemptions available for US estate and gift tax purposes, most taxpayers should now give greater attention to their exposure to UK inheritance tax and consider sensible planning. We would recommend that you review any charitable bequests within wills to ensure a deduction is available for IHT purposes, consider a regular giving strategy, and consider the potential advantages of holding assets which would potentially qualify for business property relief. For those who are deemed domiciled an aggressive gifting strategy might be considered while for those about to become deemed domiciled in the UK an excluded property trust should be considered.

As always, whenever contemplating a major transaction, you should check with us first to ensure the best integrated US/UK tax outcome for your circumstances. When multiple national tax systems are involved, something approached on auto-pilot in one country can easily trigger a ‘bad’ outcome in another regime.

If a transaction or significant payment could take place either side of the US or UK year-end, please talk to us about your options. The interaction of the US and UK tax systems is complex, and we are here to help you understand your options and make informed choices.

To discuss any points raised in further detail, please contact your Frank Hirth adviser.

Frank Hirth’s offices will close for the holidays at the close of business on Monday 24 December 2018 and will re-open on Wednesday 2 January 2019.




GIVEN THE LARGE EXEMPTIONS AVAILABLE FOR US ESTATE AND GIFT TAX PURPOSES, TAXPAYERS SHOULD FOCUS ON THEIR EXPOSURE TO UK INHERITANCE TAX.

CONTACT FRANK HIRTH’S TAX EXPERTS FOR FURTHER DETAILS AND A

US AND UK TAX YEAR END PLANNING · Whilst tax planning is not only to be considered leading up to...

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