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US and UK Year End Planning 2018: UK taxes interaction (only relevant if you pay UK income taxes)

Business Tax - 29 Nov 2018

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.

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

5. 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.

6. 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.

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.

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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