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US and UK Year End Planning 2018: Capital Gains and Losses

Private Clients - 29 Nov 2018

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.

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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.

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Lucy Townsend

Lucy Townsend

Private Client Associate Director

T: +44 (0) 20 7833 3500
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Office: London