Everfair Tax

Specialists in UK, US and Expatriate Tax.

Tax Changes from April 2024

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As we head into a new tax year, we have summarised all the upcoming changes to tax from 6 April 2024.

Personal Pensions

  • As of 6 April 2024, the Lifetime Allowance charge has been abolished.
    • This means there will be no limit on how much you accumulate in your pension in your lifetime (annual limits still apply)
  • Capped pension tax-free lump sum at £268,275 – or 25% of your pension pot, whichever is lower.
    • Any withdrawal above this will be subject to income tax at your marginal rates

ISAs

  • Tax-efficient ISA allowance remains at £20,000
  • Junior ISA annual allowance remains at £9,000
  • You can now open and pay into different ISAs of the same type in a single tax year.
  • Plans to introduce a British Stocks and Shares ISA, meant to encourage investment in British companies.
    • This would allow you to save an additional £5,000 per year tax efficiently into the new ISA
    • No date announced for when this will be available, consultation to take place

Savings Allowance

  • No changes to the personal savings allowance
  • Allowance of £1,000 for basic rate taxpayers, £500 for higher rate tax payers and £0 for additional rate tax payers

Dividends Allowance

  • Dividend allowance is being reduced from £1,000 to £500 as of 6 April 2024.

Capital Gains Tax

  • The CGT allowance has been reduced from £6,000 to £3,000 from 6 April 2024.
  • For residential property gains on disposals made from 6 April 2024, the higher rate of CGT will reduce from 28% to 24%.
    • Private Residence Relief will still apply on qualify sales of a main residence

High Income Child Benefit Charge (HICBC)

  • The threshold for HICBC will be increasing from £50,000 to £60,000.
  • The rate at which HICBC has also been halved from 1% of Child Benefit for every additional £100 earnt above the threshold to 1% for every additional £200 earnt above the threshold
  • This means the threshold for which Child Benefit will be completely clawed back has increased from £60,000 to £80,000.
  • As long as you earn between £60,000 and £80,000 it may still be worth it financially to claim the benefit.

Personal Tax

  • No changes to personal tax rates, or the personal tax thresholds.

National Insurance

  • The main rate of primary Class 1 NI contributions will be reduced by 2p from 10% to 8% on earnings between £12,570 and £50,270 per annum (2% rate remains on earnings above this amount).
  • The main rate of Class 4 NI contributions will be reduced from 9% to 6% on profits between £12,570 and £50,270 (2% rate remains on profits over this amount).
  • Removal of the requirement for the self-employed to pay Class 2 NI contributions with effect from 6 April 2024

Domicile

  • The government has announced plans to abolish the remittance basis of taxation for non-UK domiciled taxpayers and replace it with a simpler residence-based system. The changes are proposed to take effect from 6 April 2025
  • Overseas Workdays Relief will be reformed based on the new system to remove the need to retain income earned overseas outside the UK
  • There will be a consultation to move to a residence-based system for Inheritance Tax

If you have any questions about how these upcoming changes may impact you, please get in touch with your usual advisor, or email us at info@everfairtax.co.uk.

UK Year-end Planning

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We are quickly approaching the end of another UK tax filing year.  Hence, we would like to highlight some opportunities for year-end tax planning for individuals and their businesses.  

Please note the below does not constitute tax advice and each taxpayer should consult with their tax advisor.

Capital Loss Elections

UK resident, non-UK domiciled individuals who have made a claim for the remittance basis to apply in any tax year from 2008/09, and who are not deemed UK domiciled, are only eligible to claim relief for foreign capital losses if an election (a ‘loss election’) is made. Losses must be claimed separately in order for relief to be available.

There is a four-year time limit on this claim from the first year a taxpayer claims the remittance basis. In 2023/24, the latest tax year in respect of which a loss election can be made is 2019/20, which ended on 5 April 2020.

Pension Contributions

If you earn less than £200,000 (or £260,000 when factoring in all pension contributions made by yourself and your employer), then your annual tax-free allowance on pension contributions is £60,000 gross (£48,000 net). This allowance applies to the aggregate of all contributions to all registered pension schemes made by yourself, your employer, or anyone on your behalf. If you make any contributions above the annual allowance, then HMRC will recoup any tax relief on the excess contributions by taxing it as income at your highest marginal rate.

For every £2 earned above £200,000 (or £260,000 including contributions), your annual allowance is reduced by £1 to a minimum of £10,000 (reached at a maximum income of £360,000). This is known as tapering. However, it is possible to increase your annual allowance in the current tax year by utilising any unused allowance carried forward from the previous three tax years.

Please note that the annual allowance is remaining at £60,000 from 6 April 2024 (2024/25).

Pension Lifetime Allowance

The lifetime allowance is the total amount of pension benefits a taxpayer can build up in their lifetime before they need to pay a lifetime allowance charge. It applies to all personal and workplace pensions but not the state pension.

Although this charge was removed from 6 April 2023, the lifetime pension allowance will be scrapped from 6 April 2024 meaning pension holders will no longer have to pay 55 per cent tax on withdrawals from pots over £1.073m, or 25 per cent plus income tax if removed as income. The allowance remains relevant, however, for the limitation of the tax-free lump sum that can be taken.

Deemed Domicile

If a taxpayer has been resident in the UK for 15 out of the previous 20 tax years, they no longer have the ability to claim the remittance basis of taxation and must declare their worldwide income and gains. Please see the section on “Remittance Basis Charge (RBC)” for further information on the remittance basis.

If you anticipate becoming deemed domiciled in the UK on or after 6 April 2024, you may wish to consider some additional planning to manually uplift the cost basis of your shares or setting up a protected settlement. Please speak to your advisor if you are due to become deemed domiciled in the near future.

Remittance Basis Charge (RBC)

This only applies if:

  • an individual has made a claim for the remittance basis; and
  • he/she is 18 or over in the relevant tax year; and
  • he/she has been resident in the UK for at least 7 of the previous 9 tax years.

These individuals can only use the remittance basis if they agree to pay a tax charge of £30,000 per tax year.

This RBC will be in addition to any UK tax on income and gains actually remitted in the tax year.

A higher remittance basis charge of £60,000 applies where the individual claims the remittance basis and has been resident in the UK for at least 12 of the previous 14 tax years.

Taxpayers caught by the RBC have 2 choices:

  1. To pay UK tax on all their foreign income as it arises (ie, go for arising basis); or
  • To claim the remittance basis (and thereby keep their unremitted foreign income and gains outside the reach of UK tax), but at a cost of £30,000 per annum where they have been resident for at least 7 of the previous 9 tax years, or £60,000 per annum if they have been resident for at least 12 of the previous 14 tax years.

 The RBC does not apply to:

  • Non-domiciled taxpayers who have unremitted foreign income and gains of less than £2,000 per annum. As such taxpayers do not have to claim the remittance basis (it applies automatically), they will not be caught by the charge; or
  • Taxpayers who have not been resident in the UK for seven or more of the last nine tax years. Such individuals can claim to use the remittance basis for foreign income and gains without any tax penalty (apart from a loss of personal allowances and the CGT annual exemption); or
  • Taxpayers under the age of 18 at the end of the tax year

The choice between switching to the arising basis or paying the RBC will depend on the facts and circumstances of the taxpayer and should therefore be discussed with the relevant advisor ahead of the 8th tax year of residence in case any elections/planning can be undertaken before this becomes relevant.

Capital gains tax – Annual exemption decreasing from 6 April 2024

If you are a UK resident, you are also entitled to a certain tax-free amount of capital gains. This is known as the Annual Exempt Allowance (AEA), sometimes referred to as the annual exemption. For 2023/24 this is £6,000 for individuals or £3,000 for trustees. The annual exemption is being reduced for the 2024/25 tax year to £3,000 for individuals and £1,500 for trustees.

If you have exceeded your limit already you may consider gifting assets to your spouse or civil partner to take advantage of their unused limits or lower rates if applicable.

Dividend allowance reduction from 6 April 2024

In addition to your personal allowance, you also receive an annual dividend allowance. You do not pay tax on any dividend income which falls below this allowance, nor on any dividends received from shares in ISAs. Any dividend income received beyond your annual allowance in 2023/24 is taxed at 8.75% if you are a basic rate taxpayer, 33.75% as a higher rate taxpayer, or 39.35% as an additional rate taxpayer.

For 2023/24, the dividend allowance is £1,000. However, this is being reduced to £500 in 2024/25.

ISA Contributions

The total allowable ISA contribution for 2023/24 is £20,000, with the tax year ending on 5 April 2024.

Changes coming into effect from 6 April 2024 will enable greater flexibility for savers.  Savers will be able to pay into more than one of each type of ISA each year (not possible under current rules) and move more easily between different providers.

Savers who invest in “innovative finance ISAs”, which are ISAs that contain peer to peer loans, will also be able to invest in a broader range of investments. 

PAYE Code

A review of your PAYE code can help to ensure the correct amount of tax is being withheld at source on any employment income or pension distributions you will receive from 6 April 2024.

Sale of Residential Property

The sale of a UK residential property (not main home) by a UK resident taxpayer must be reported and any capital gains tax paid within 60 days of completion.

This does not apply to sales that result in a loss.

Non-UK residents must report all sales even if no gain or tax arises.

National Insurance

From 6 January 2024, the main rate of class 1 National lnsurance Contributions (NICS) was cut from 12% to 10% for workers earning between £12,570 and £50,270.

For the self-employed, class 2 NIC will be abolished from April 2024.  In addition, the rate of class 4 NIC will fall from 9% to 8% on profits over £12,570.

In the Spring Budget, the Chancellor announced a further 2% cut in the NIC rates with effect from 6 April 2024, bringing the rates for workers and self-employed to 8% and 6% respectively.

We, at Everfair Tax, have the in-house expertise to advise you in these specialist areas.

Spring Budget 2024

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Jeremy Hunt has just delivered what is thought to be the last budget before the next general election. There was a combination of policies which had been widely trailed over the past week but also some surprises, which in the face of an impending election, is to be expected. 

Changes to non-dom:

The big news was the end of the current rules for non-doms. Some form of change was expected but what was announced was not the Italian style flat rate scheme many had suggested was coming. As always with Budget announcements, the devil is in the detail, so we will need to wait to see how the proposed changes translate into draft legislation, but the headlines are:

  • The current remittance basis regime for non UK domiciliaries will be abolished with a move to a residence based system, removing the concept of domicile. 
  • From April 2025, new arrivals will not pay income tax and capital gains tax on foreign income for the first 4 years of residence, without the need to keep the income/gains offshore. This is so long as they have not been resident in the previous 10 years. 
  • There will be transitional rules for longer-term resident taxpayers who will lose access to the remittance basis from April 2025, including a 50% reduction in the tax charge on 2025/26 foreign income/gains, an option to rebase assets to April 2019 for CGT, and a 2 year window to remit foreign income/gains at a reduced tax rate of 12%.
  • Another element of the proposed overhaul of the domicile rules are the rules around offshore trusts they create. From April 2025, the income and capital gains benefits that currently exist to limit the liability for tax on trust income and gains to the amount of distributions received will be removed, leaving the potential for all of the trust income and gains to be taxed.
  • There was also a clear statement of intent to move IHT for non-doms to a residence based regime with IHT being due on worldwide assets after 10 years of tax residence (and for 10 years after leaving the UK), but this will be consulted on later in the year. 
  • Overseas workday relief will still be available for the first 3 years of residence, but without the need to keep the foreign income outside the UK. 

Given that legislation bringing most of these proposals into effect will not be in place before the general election is called later this year, and we have a potential change of Government, it’s therefore difficult to tell at this point if these will ever come into force or if so in what form without the benefit of a crystal ball. It may therefore be worth waiting for further developments before taking any action.

In other news:

  • Reduction in NICs of 2% for both  employees and self-employed individuals from 2024/25
  • The top rate of CGT on residential property sales will be reduced from 28% to 24% for disposals from 6 April 2024; the basic 18% rate remains unchanged.
  • High Income Child Benefit Charge – for 2024/25, the income threshold will raise from £50k to £60k, with the charge being the full amount of the allowance claimed when income reaches £80k (previously £60K).  The suggested intention is to move in the future to a household income basis for assessing the charge.
  • The Furnished Holiday Letting (FHL) regime will be abolished from April 2025, bringing those properties into line with regular longer term lets.
  • Consultation on a new UK ISA, with an additional £5k allowance, to promote investment in UK companies.

US Tax Year End Planning for US/UK Connected Taxpayers

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We are quickly approaching the end of another US tax filing year.  Hence, we would like to highlight some opportunities for year-end tax planning for individuals and their businesses.  This post will focus on US taxpayers who have UK connections.  Please note the below does not constitute tax advice and each taxpayer should consult with their tax advisor.

Foreign Tax Credit Planning

US taxpayers with foreign sourced income can claim a credit for taxes paid to foreign taxing authorities.  This can be done by either the paid or accrued method.  For UK taxpayers on the paid method, a US credit is available for UK taxes paid during the calendar year.

Due to differing tax years in the US & UK, the matching of payments and income can become an issue. For UK tax purposes, the tax related to the 2023 US tax year will not be due until January 31st, 2024 or January 31st, 2025. Therefore, US taxpayers should generally aim to file and pay their UK taxes prior to December 31st unless:

  • Tax has been withheld throughout the year and/or
  • Excess accumulated tax credits are available in the appropriate tax basket.

Furthermore, certain calendar year income arising after April 5th may need an additional pre-payment to HMRC prior to December 31st. This will ensure the availability of a corresponding credit in the appropriate tax basket on the 2023 US tax return.

Below are some general examples of where this may apply:

Investment Income & Capital Gains Arising Post April 5th, 2023.

Investment income and/or capital gains arising after the 5th of April may require a pre-payment to HMRC before December 31st. This is generally due to a shortage of tax credits in the passive tax basket. Investment income will generally be classified as passive income for US tax purposes. Most taxpayers will have excess foreign tax credits from employment which sit in the general limitation tax basket. However, general limitation foreign tax credits will not be allowed as an offset for passive income.

One off Taxable Events

Certain one-off events such as the sale of a UK property may require a payment to HMRC before December 31st. The nature of the income and the taxpayer’s excess foreign tax credit position will determine if a payment is needed.

Distribution from a Trust

A distribution from a trust may also warrant the need for a payment. Taxation of trust income is a highly complex area.  If applicable, we highly recommend speaking with a specialist tax advisor.  Everfair has qualified US and UK trust specialists who can advise on trust related tax matters.

Moving from the Remittance to the Arising Basis

Taxpayers moving from the remittance to the arising basis may need to make a payment to HMRC before December 31st. This will generally be due to the lack of accumulated excess foreign tax credits.

Sole Proprietors

Self-employed taxpayers do not have monthly payroll withholding and are responsible for paying in their own taxes. Those who are new to the UK may unknowingly pay their UK tax in January following the US calendar year. Furthermore, they generally will not have accumulated carry-forward foreign tax credits available for US tax purposes. This can result in a US tax liability with no corresponding tax credit offset. While there is a one-year carry-back mechanism in place, this cannot be claimed until the following US tax filing year. This can cause unexpected cash flow issues. Therefore, a determination should be made as to whether a payment to HMRC is needed prior to December 31st.

Partners of UK Partnerships

Partners are not considered employees and will be responsible for paying in their own taxes. Those who become a partner during the year will need to consider the tax due on their calendar year profit. They will likely need to make a UK tax payment on their calendar year partnership profit prior to December 31st.

Key Takeaway:  If any of the above situations apply, it is recommended to seek advice from a US tax advisor. We at Everfair have a specialist team of US & UK tax advisors.   We work with high-net-worth individuals, trusts, and owner managed businesses in planning their tax affairs in a tax efficient manner.

Timing of Taxable Events – 2023 vs 2024

Cash basis taxpayers and businesses can consider if:

  • Income can be recognized in the year where the marginal rate of tax will be lower or
  • Expenses can be deducted in the year where the marginal rate of tax will be higher.

Alternatively, if the marginal tax rate is not expected to change between 2023 and 2024:

  • Accelerating a deduction such as a charitable contribution (subject to individual AGI limits) can generate tax savings in 2023 or
  • Deferring taxable income to 2024 can assist with overall cash flow and timing of tax payments for one year.

Items to consider for acceleration in 2023 or delay until 2024:

  • Sale transactions
  • Crystallizing losses to offset potential gains.
  • Timing of dividend payments from your business
  • Charitable contributions of cash or appreciated securities (subject to individual AGI limits)
    • Contributions made to dual-qualifying US/UK charities through a donor advised fund enables tax relief in both countries.
    • Contributing appreciated securities which are subject to the UK Offshore Income Gain regime to a UK qualified charity.
      • Can offset the negative UK tax impacts provided the recipient is a UK registered charity.

Considerations for Founder Shareholders of US Corporations Operating on a Calendar Year:

  • Write-off of business bad debts that are uncollectible.
  • Pay out of year-end bonuses.
  • Purchasing property and equipment qualifying for bonus depreciation

Gifting and Sunset of Estate Tax Lifetime Exemption

A US person can make gifts within the annual US allowance of $17K to each recipient.  A married couple where both spouses are US persons can make a joint gift of $34K. 

The annual gifting allowance to a non-US spouse is $175K.  This can assist in transferring assets which are not tax efficient for the US spouse, such as the UK home.  

Additionally, the US lifetime estate tax exclusion of $12.92M will sunset on the 1st of January 2026 to $5M . with an inflationary adjustment, unless legislation is put into place to change this.  It is always recommended to seek the advice of a tax advisor in estate tax/IHT matters.  Estate/Inheritance tax is a separate regime from income tax.  For US/UK connected taxpayers, it is important that the laws of both countries are considered in inheritance planning.    

Key Takeaway:  Each individual situation is unique and dependent on the individual facts and circumstances. Further complexities may arise for US connected business owners, estates, and trust beneficiaries. Therefore, it is recommended that you consult with a specialist US/UK tax advisor.  We at Everfair have the in-house expertise to advise you in these specialist areas.

Transatlantic Trust Issues and UK vs US Trusts

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Complications that can arise in UK/US trusts

A family trust remains a popular vehicle to allow for the passing of wealth to the next generation. This is because it can provide flexibility, discretion and an element of control which is attractive to many.

For US citizens, US trusts are often discussed in estate planning. They are an efficient vehicle to deal with often time consuming and costly probate processes in various states.

For transatlantic mobile families, the creator of a trust might be in one country and the beneficiaries in another. It is therefore very important to understand the rules applying to such arrangements.

Residence Position of Trusts – UK vs US

In many cases, the UK and the US both consider trusts as separate taxable entities from those who create them and from those who can benefit from them. Both therefore have rules which establish the tax residence position of the trust.

In the UK, the residence of the trust is determined by the residence of the Trustees. A situation can arise where some of the Trustees are resident in the UK and some outside the UK. Where this happens, the domicile and residence of the settlor at the time when the trust was funded also has a bearing on its residence status.

From a US tax perspective, the residence of a trust is established by the Court and Control Tests. In order for a trust to be considered ‘US resident’, a US court must be able to exercise primary jurisdiction over the trust, and a US person or persons must have the authority to control all of the substantial decisions of the trust.

Tax Position of US Trusts

For US tax purposes, the income and gains of a US trust are tentatively taxable at the trust level.  However, where distributions have been made to the beneficiaries, the trust is entitled to a deduction against its income (but generally not against its capital gains) for the amount distributed.  That income is then passed on to the beneficiaries and subject to tax in their hands.  Trust capital gains are generally taxed at the trust level regardless of distribution.

It is worth noting that, in general, US tax rates for trusts are less beneficial than those for individuals.

There is an exception to this in the case of trusts which are classified as “grantor trusts”.  Trusts generally fall within this classification if the grantor is also a beneficiary of the trust or retains certain powers over the assets held in the trust.  In these circumstances, the assets of the trust are considered to be owned by the grantor (or grantors) for US income tax purposes, and any income or gains would typically be taxed in their hands rather than at the trust level.

From a UK tax point of view, there would typically be no tax on a US trust at the trust level except to the extent that the trust held UK assets that generated UK taxable income (e.g. UK real estate or UK business interests).

Tax Position of UK Trusts

The US tax treatment of a UK trust will depend very much on the nature of the trust. 

If the trust is considered a “Foreign Grantor Trust” (broadly, any trust resident outside the US which was settled by a US person and could benefit a US person), the assets and any income or gains arising would be subject to tax in the hands of the grantor.

If the trust is not a “Foreign Grantor Trust”, the trust itself will not be subject to US tax except to the extent that the trust held US assets that generated US taxable income (e.g. US dividends, US real estate or US business interests).  Distributions to US beneficiaries will however result in potential tax charges to those beneficiaries, as discussed below.

For UK tax purposes, a UK trust will be liable for tax on its income and gains.  Generally, this tax will be applied at the highest rates (currently 45% for income, 39.35% for dividends, and 20% or 28% for capital gains).

There are special rules for “settlor interested trusts”.  These are typically trusts where the settlor is also among the class of beneficiaries.  In these circumstances, the settlor will typically be liable to UK tax on the income and gains of the trust with credit available for the tax paid by the trust.

Beneficiaries of UK vs US Trusts

Both countries also have their own rules as to how they regard distributions to tax resident beneficiaries.

In the UK, income distributions from a UK trust to a UK resident beneficiary result in that income being subject to tax in the hands of the beneficiary, but with a tax credit for the tax paid by the trust.

Where a UK resident receives an income distribution from a US trust, they will be subject to tax on that income.  If the beneficiary is also a US taxpayer, the availability credits for foreign taxes will depend on the nature of the income and how it is dealt with under the terms of the UK/US tax treaty.

Capital distributions from foreign trusts to UK resident beneficiaries are often more problematic, as they can be matched to trust capital gains of the current year, prior years, and even future years.  The resulting matched gains are then taxed in the hands of the beneficiary with penalty taxes applying in the case of distributions matched to historic capital gains. A key problem that can arise in these circumstances is that a UK beneficiary could be personally liable for UK tax on a capital gain realised by a US trust in an earlier year on which that US trust has already paid US taxes.

From a US perspective, beneficiaries receiving distributions of income from a US trust will be subject to US income tax on their share of the trusts income.  The types of income generated at the trust level will retain their character in the hands of the beneficiary (e.g. distributions representing interest will be taxable as interest, distributions representing dividends will be taxable as dividends, etc.).

Beneficiaries receiving distributions from a foreign nongrantor trust are similarly subject to US income and capital gains tax, where the distribution represents current year income and gains.

However, if the income and gains of a foreign nongrantor trust (known as distributable net income or DNI) are not distributed within the calendar year or within 65 days of beginning of the new calendar year if an appropriate election is made, they become undistributed net income (UNI).  If a distribution during the year exceeds the DNI of the trust, it is next considered to represent UNI.

The tax computations and reporting for distributions of UNI are extremely complex.  When UNI is distributed to a beneficiary, it is taxed as ordinary income regardless of its original nature.  The tax rate applied to this income is based on an average rate of three of the preceding five tax years (disregarding the highest and the lowest). Additionally, interest is chargeable on the tax due based on the number of years that the trust has been in existence.

Without careful planning, it’s very easy for inefficient tax situations to arise. For example, where the income and gains are taxed on the trust in one country. But the beneficiary is potentially being taxed on the income and gains of the trust in the other county. This can cause double taxation issues as it is a situation not well provided for in the double taxation agreement. 

In Summary

Are you a family considering setting up a family trust where there are people involved both in the UK and US? If so, it is important to carefully consider where the trust should be tax resident. You need to ensure it is set up appropriately. There are a number of factors to consider in this decision including the expected level of income and gains and expected distribution policy of the trust. It’s really important to take advice in order to be as tax efficient as possible.

Shortlisted for Best Employer in Tax

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Tolley Taxation Awards

Ahead of the upcoming Tolley Taxation awards, where we have been nominated for Best Employer in Tax, we wanted to share some of the staff testimonials that contributed towards our award submission.

From a team member who was part of our first trainee programme last summer

“The team culture is incredible. I have worked for multiple companies in multiple industries but have never experienced anything like Everfair. I felt like I had been a part of the team for years in a very short period of time. Everyone is so welcoming and friendly; it definitely helped me with starting. The culture is also amazing, the team is very close, which helps with work and out of work activities. There is such a variety of people as well, coming from different backgrounds. Everyone is very inclusive and welcoming.” CA

From a team member who referred someone to be our trainee programme

“The team is fantastic and knew he would benefit from the positive team culture we have, as well as the depth of technical knowledge and resources we have available to us, which you might not expect from a smaller firm.

Everfair is a great place to grow and move up the ranks. I’ve never seen a company that prioritises growing and career progression within the company, before looking externally.” SS

From a team member who originally joined in the admin team, and transitioned to the tax team

“Despite the team growing quickly within the last eighteen months, with ten people having joined after me, the company has gone to lengths to make sure that the friendly team culture has not been lost. You very quickly forget who the new joiners are as they fit into the team dynamic so well.

From a personal perspective, the team at Everfair makes me want to go above and beyond in my work, not because I am expected to work beyond the requirements of my job, but because I want to put in the support to the team that I feel I get back from them.” RR

We are delighted to see that members of our team have such positive comments to make about our culture. Culture is something we are continually working on and striving to improve; to harness a great working environment.

As well as our culture, we are really proud to endorse our team first. Prioritising promoting internal career progression, and factoring people’s development goals into our bigger plans.

The past 12 months have been a period of implementing process changes, improving the way we do things, and growing our team, with two trainee programmes. With all this, it is imperative for us that we maintain and keep our company values, where people are at the centre of everything we do.

Inheritance Tax for Settlor Interested Offshore Trusts

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Inheritance tax for settlor interested offshore trusts

In the previous part of our series on offshore trusts we considered the UK capital gains tax treatment of beneficiary-taxed offshore trusts.  In this sixth part of our series we consider the inheritance tax (IHT) treatment of settlor interested offshore trusts

This is part 6 of our Offshore Trusts blog series, written by our Associate Director Lawrence Adair. Read part one here: ‘All you need to know about Offshore Trusts’. Part two here: ‘Residence Positions and Offshore Trusts’. Read part three here: ‘Settlor-Interested Offshore Trusts’ . Read part four here: ‘Beneficary-Taxed Offshore Trusts’ Read part five here: ‘Capital Gains Tax on Beneficiary-Taxed Offshore Trusts’

General exposure to IHT

There are no specific IHT provisions for offshore trusts – provisions apply equally to UK and offshore trusts.

The scope of IHT is primarily based on domicile and situs of assets as follows:

UK domiciles:                 Worldwide assets

Non-UK domiciles:       UK assets only (non-UK assets are regarded as ‘Excluded Property’)

Importance of settlor’s domicile

For trusts, it is the domicile of the settlor when assets first became comprised in the trust that is relevant.  The residence of the trustees is not important for IHT. 

So if the settlor was non-UK domiciled when the assets first became comprised in the settlement, the scope of IHT for the trust is limited to its UK assets.  This is so even if the settlor’s domicile subsequently changes, subject to one exception.  Trusts whose settlor is a ‘formerly domiciled resident’ are subject to IHT on their worldwide assets regardless of the settlor’s previous domicile.  A ‘formerly domiciled resident’ is someone who is UK born, has a UK domicile of origin and is UK resident for the tax year and at least one of the two preceding tax years.

Assets subsequently added to the settlor’s trust and transfers between trusts

If funds are subsequently added to a trust, the settlor’s domicile position is revisited.  It is, though, possible to keep the original and added funds separated for excluded property purposes.

The settlor’s domicile position is also revisited where there is a transfer between settlements.  If they are UK domiciled at the time, the transferee settlement cannot qualify.

Situs of assets for IHT purposes

The situs of assets for IHT purposes is based on common law principles.  The situs of some of the more common types of assets are given below:

Registered shares and securities:       where the register is held

Land and property:                                  where the land is located

Bank accounts:                                          where the branch is located

Simple debts:                                             where the borrower resides

Specialty debts:                                         where the deed is held (unless the debt is secured solely on UK property)

Partnership interest:                               where the business is carried on

LLP interest:                                                as for registered shares and securities

‘Excluded property trusts’ and use of non-UK underlying companies

Trusts set up by non-UK domiciliaries are often referred to as ‘Excluded Property Trusts’.  This is because they typically only hold non-UK situs assets (i.e. excluded property) to keep the trust outside the scope of IHT.

If there is a desire to hold UK assets these will typically be held via a non-UK underlying company.  This adds a corporate veil over the assets meaning the trust still only holds non-UK assets.  This solution does not apply for UK residential property interests which since 2017 have been subject to special provisions.

UK residential property interests from 2017

From 6 April 2017, certain UK residential property interests are not excluded property despite them being non-UK situs assets under the situs rules.  The interests concerned include:

  • interests in non-UK partnerships and closely held non-UK companies, to the extent their value is attributable to UK residential property;
  • loans financing the acquisition or enhancement of UK residential property and residential property interests; and
  • collateral put up for such financing.

Furthermore, proceeds realised from the disposal of residential property interests (partnerships and companies) and the repayment of loans remain exposed to IHT for two years afterwards.

Gift with reservation of benefit

Where the settlor of a trust is also a beneficiary, gift with reservation of benefit provisions apply which effectively mean trust assets remain within the settlor’s estate for IHT purposes.  However, excluded property rules take priority over gift with reservation rules.  Therefore, property which qualifies as excluded property is not subject to the gift with reservation provisions.

Relevant property regime

Except for certain beneficiary taxed interest in possession trusts, trusts are subject to an IHT relevant property regime to the extent of non-excluded property.  This broadly subjects trusts to IHT each 10 year anniversary with proportionate charges where capital leaves the trust between 10 year anniversaries.  With the exception of the two-year overhang for UK residential property interests, it is the situs at the point of the relevant charge that is important for whether assets are excluded property or not.

3 most important points to take away

Inheritance tax for trusts is based in the settlor’s domicile and situs of assets rather than the residence of the trustees

Trusts created by non-domiciled settlors can be kept outside the scope of inheritance tax by holding only non-UK assets (UK assets can be held via non-UK companies for this purpose though this is not effective for certain UK residential property interests)

Even if the settlor is a trust beneficiary, gift with reservation anti-avoidance rules do not apply to excluded property held in trusts

Written by Lawrence Adair

Conducting Business in the US with an Established UK Business

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Owner Managed Business Series: Transatlantic Moves (US & UK) and the US Tax Impacts

There are numerous reasons why you may consider a transatlantic move – work, love, family. Whatever the driving forces, there are undoubtedly many factors to consider, particularly as a business owner. Business owners must assess both business and personal impacts, especially if operating from both sides of the Atlantic.

The Transatlantic Move: Series Explanation

There are three articles in our Transatlantic move series. This series of articles will consider the tax impacts of moving between the US & UK as a business owner. They will focus on various tax issues and implications for the individual owner and their business. Thereby, highlighting areas of potential adverse and double taxation for business owners looking to make a transatlantic move.

Each article aims to provide an overall awareness and potential impacts of the highlighted tax areas. It is not a comprehensive analysis or specific tax advice. They are based on the tax law in place at the date of the articles.

Each individual situation is unique. You may feel that you potentially fall into the areas discussed within these articles. As such, you are advised to take specialist advice which considers your particular facts and circumstances. At Everfair, our specialist team of US & UK tax advisors work with high-net-worth individuals, trusts, and owner managed businesses. We can advise you in planning your affairs to maximize the tax efficiency on both sides of the Atlantic.

The Transatlantic Move: Series Breakdown

  • The first article examined general areas of consideration for a British business owner moving to the US. It focused solely on their individual tax matters.
  • The second article will focus on moving to the US with an established UK business. It will address various tax issues and implications to the business and its owner.
  • The third article will focus on moving to the UK with an established US business. It will address various tax issues and implications to the business and its owner.

Article 2: Moving to the US with an Established UK Business

The second article in our owner managed business series focuses on moving to the US with an established UK business. It considers the US tax impacts and implications to the business and its owner.

Moving to the US with an existing UK business will require careful thought and planning. The primary purpose and length of your stay will drive how you structure your business in the US & UK. You will want to minimize unnecessary administrative burdens and avoid adverse or double taxation upon your move to the US.

The Transatlantic Move to the US with an Established UK Business: Summary 

This article explores the potential US tax implications when moving to the US with an established UK business. It will cover the following areas:

  • How the business and its owner will be taxed in the US
  • Points to note when setting up a US entity
  • State income and sales tax implications
  • Minimizing double taxation by highlighting certain non-US friendly company structures

US Taxation of an established UK Limited Company and its Owner

The UK limited company is generally the most common vehicle when setting up a business in the UK. The company files separate accounts and tax returns with HMRC. The owner is taxed upon distribution, mainly through salary or dividends. For purposes of this article, we will consider a UK limited company that is owned 100% by a single owner. We will consider the US tax implications of moving to the US with an established UK business for both a:

  • British national business owner moving to the US
  • US citizen, UK resident business owner moving back to the US

British National Business Owner Moving to the US

Upon becoming US tax resident, the British business owner will be subject to US personal income tax reporting. This includes informational reporting in relation to any non-US company interests. The UK company profit may be subject to tax on an annual basis at the owner’s effective ordinary tax rates. This is subject to the extent the UK company has profits sourced outside the US, absent any US tax elections. This is different from the tax treatment reported in the UK which is based on distributions rather than company profit.

The UK company will likely be deemed doing business in the US, especially if the owner is performing services there. It will become subject to its own income and payroll tax reporting and filing requirements. The company will be taxed at the current Federal corporate tax rate of 21%. The company may also be subject to state tax filing and reporting which we will cover later in this article.

US Citizen, UK Resident Business Owner Moving back to the US

US citizens are subject to tax and reporting on a worldwide basis, regardless of where they are living. Therefore, a US citizen business owner living in the UK will have already been subject to annual US tax reporting. They will also have been subject to US tax reporting in relation to their UK company interest. Their reporting obligations will continue upon moving back to the US.

The US citizen business owner may also have made certain US tax elections whilst living in the UK. These elections may have been made to mitigate the potential for double taxation. A discussion of these various elections is beyond the scope of this article. These elections may have been beneficial whilst living in the UK. However, they should be reviewed if they will continue to be tax-efficient whilst living in the US.

The UK company will likely be deemed doing business in the US, especially if the owner is performing services there. It will become subject to its own income and payroll tax reporting and filing requirements. The company will be taxed at the current Federal corporate tax rate of 21%. The company may also be subject to state tax filing and reporting which we will cover later in this article.

Setting up a US Entity

At the onset, it may seem logical to set up a separate US entity upon moving to the US. In many cases, this may be the right decision. However, it is important to consider the situation in whole. A decision to set up a separate US entity should factor in your individual facts and circumstances. This will help determine the type of entity and ownership structure needed in relation to your UK company. In certain cases, it may be determined that a UK entity is no longer needed. In this instance, you may consider winding up your UK company prior to moving to the US.

Some key factors to be considered in the initial analysis include the following:

  • Length and purpose of your stay
  • Where you will conduct business
  • Where your clients are located
  • Short and long-term growth plan of the business
  • The amount of time you will be spending in the US and UK
  • Where your employees will be located
  • Are you looking to attract outside investors?
  • What is the timing and exit strategy?

Other areas to consider include pension and healthcare for yourself, your family, and your employees. You may also want to consider tax planning for retirement.

Dependent on your individual situation, there are a variety of entity options available in the US. Each option has varying levels of reporting, setup, and tax implications. For individuals with a footprint in both the US and UK, the level of reporting will likely increase.

State Tax Considerations

Another important area to consider when moving to the US with an established UK business is state tax. Each state has different rules to determine if you are transacting business (creating nexus) in the state. This can result in additional registration, filing and tax implications, despite having no physical presence in that state.

The two general areas of consideration from a state tax perspective are:

  • Income tax
  • Sales tax

State and Local Income Tax Nexus/Economic Nexus

The first consideration for state and local tax is nexus for income tax purposes. Each state has their own set of criteria and/or revenue thresholds. Certain local jurisdictions such as New York City and the City of San Francisco also have separate thresholds. These thresholds apply to the following:

  • Performing/providing services to clients located and deriving benefit of the services within the state or local jurisdiction
  • Sale of physical or digital products to customers located and deriving benefit within the state or local jurisdiction

Initially, where you live and perform your services may trigger business state registration and filing for income tax purposes. Depending on the state and type of business entity, sales can be sourced to a state based on either:

  • Customer location
  • Where the services are performed

Certain states such as Massachusetts and New York have revenue thresholds which will trigger economic nexus for income tax purposes. The current thresholds in Massachusetts and New York are:

  • Massachusetts – annual sales (on a calendar year basis) greater than $500K.
  • New York – annual sales (on a calendar year basis) greater than $1,138,000.

Not all states operate based on annual revenue thresholds. Income tax nexus can instead be based upon having employees, property, or an office in the state. State corporate income tax rates vary. They can range from zero to 11.5% depending on the state and local jurisdiction. Certain locales such as New York City assess their own local tax to companies and individuals.

State and Local Sales Tax Nexus

Sales tax is a separate class of tax similar to VAT. It can be assessed at a state or local level on certain types of sales and services. The threshold to trigger sales tax can vary but is generally $100K of sales. Once nexus is established, it will require company registration and collection of sales tax from customers. The tax collected is remitted to the state and applicable local jurisdictions by filing sales tax returns.

States are closely monitoring companies that sell or provide services into their state and assessing harsh penalties for non-compliance. Therefore, it is important to review the rules to determine if your business will trigger nexus for sales tax purposes.

Minimizing Double Taxation

A review of the company structure and US tax classification should be conducted in advance of moving to the US. Certain US tax elections may have optimized the tax efficiency for a US citizen living in the UK. However, it may not be tax efficient when living in the US. Therefore, to minimize any potential for double taxation, you should speak with a US tax specialist prior to moving.

Potential Pitfall:  Non-US Friendly Company Structures

In addition, below are two tax traps to be aware of:

1 – UK Investment Company

If either of the following apply, you may be subject to a punitive taxing regime in the US:

  • You own an interest in a UK investment company or
  • Your UK company holds investments or assets which generate passive income such as interest, dividends, or rental income

If either of the above apply, it is advised to consult a US tax specialist prior to your move. This will ensure that any potential areas of double taxation or adverse tax implications are identified and mitigated.

2 – US Limited Liability Corporation (LLC) or S-Corporation

The US LLC is a popular vehicle in the US due to its flexibility and relatively simple set-up. Whilst it is a corporate entity for legal purposes, it is taxed as a transparent entity in the US. It also has minimal initial and annual filing fees compared to incorporation. The income of the LLC is passed through to its owner(s) annually and is reported on their personal tax return(s). The LLC owners can then draw distributions from the LLC tax free up to the amount previously taxed or contributed.

The S-corporation is another hybrid entity that is often utilized by small business owners in the US. S-corporations have certain tax advantages unavailable to an LLC or corporation. Similar to an LLC, it is a corporate entity for legal purposes but is taxed as a transparent entity. The income of the S-corporation passes through to its owner(s) annually and is reported on their personal tax return(s).

Whilst resident in the US, these entities may be tax efficient. However, as a UK resident, it may cause potential double taxation. The UK will tax the owner upon distribution as it views these entities as opaque, corporate bodies. As such, no corresponding credit for taxes previously paid in the US will generally be allowed in the UK.

Also, a change in residency status may trigger an automatic change in the status of the S-corporation. This may carry potential subsequent tax implications.

Therefore, it is important to take US tax advice if either of the below apply:

  • You own an LLC or S-corporation and foresee moving back to the UK after a certain period
  • You own an LLC or S-corporation and may be considered a UK tax resident during your time in the US

This will ensure any potential exposure to adverse or double taxation relating to your LLC or S-corporation is minimized.

Key Takeaway:

The above does not cover every tax consideration when moving to the US with an established UK business. However, it highlights the importance of reviewing your overall company structure with a US tax specialist prior to your move. This will ensure that any potential areas of adverse or double taxation are identified and minimized.

At Everfair, our specialist team of US & UK tax advisors work with high-net-worth individuals, trusts, and owner managed businesses. We can advise you in planning your affairs to maximize the tax efficiency on both sides of the Atlantic. 

Stay tuned for our third and final article in this owner managed business series. The final piece will delve into the tax issues of moving to the UK with an established US business.

Written by Sara Kim

US Tax Year End Planning Considerations for Business Owners

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As we approach the end of the tax year for US tax filers, there are opportunities for year-end tax planning. This article will focus on the tax planning aspects for US connected business owners living in the UK. It is intended for general informational purposes rather than specific advice.

Foreign Tax Credit Planning

US taxpayers living in the UK can claim a credit on their US tax return for UK taxes paid. Those on the paid method can claim a credit for UK taxes paid on foreign income during the calendar year. Due to differing tax years in the US & UK, the matching of payments and income can become an issue. For UK tax purposes, the tax is not due until January 31st after the corresponding US calendar tax year. Therefore, US taxpayers should generally aim to file and pay their UK taxes prior to December 31st unless:

  • Tax has been withheld throughout the year and/or
  • Excess accumulated tax credits are available in the appropriate tax basket

Furthermore, certain calendar year income arising after April 5th may need an additional pre-payment to HMRC prior to December 31st. This will ensure the availability of a corresponding credit in the appropriate tax basket on the 2022 US tax return.

Below are five general examples of where this may apply:

Sole Proprietors

Self-employed taxpayers do not have monthly payroll withholding and are responsible for paying in their own taxes. Those who are new to the UK may unknowingly pay their UK tax in January following the US calendar year. Furthermore, they generally will not have accumulated carryforward foreign tax credits available for US tax purposes. This can result in a US tax liability with no corresponding tax credit offset. While there is a one-year carryback mechanism in place, this cannot be claimed until the following US tax filing year. This can cause unexpected cash flow issues. Therefore, a determination should be made as to whether a payment to HMRC is needed prior to December 31st.

Partners of UK Partnerships

Partners are not considered employees and will be responsible for paying in their own taxes. Those who become a partner during the year will need to consider the tax due on their calendar year profit. They will likely need to make a UK tax payment on their calendar year partnership profit prior to December 31st.

Investment Income & Capital Gains Arising Post April 5th, 2022

Investment income and/or capital gains arising after the 5th of April may require a pre-payment to HMRC before December 31st. This is generally due to a shortage of tax credits in the passive tax basket. Investment income will be classified as passive income for US tax purposes. Most taxpayers will have excess foreign tax credits from employment which sit in the general limitation tax basket. However, general limitation foreign tax credits will not be allowed as an offset for passive income.

One off Taxable Events

Certain one-off events such as the sale of a business may require a payment to HMRC before December 31st. A distribution from a trust may also warrant the need for a payment. The nature of the income and the taxpayer’s excess foreign tax credit position will determine if a payment is needed.

Moving from the Remittance to the Arising Basis

Taxpayers moving from the remittance to the arising basis may need to make a payment to HMRC before December 31st. This will generally be due to the lack of accumulated excess foreign tax credits.

Key Takeaway:  If any of the above situations apply, it is recommended to seek advice from a US tax advisor.

Timing of Taxable Events – 2022 vs 2023

Where possible, consideration should be given if:

  • Income can be recognized in the year where the marginal rate of tax will be lower or
  • Expenses can be deducted in the year where the marginal rate of tax will be higher.

Alternatively, if the marginal tax rate is not expected to change between 2022 and 2023:

  • Accelerating a deduction such as a charitable contribution (subject to individual AGI limits) can generate tax savings in 2022 or
  • Deferring taxable income to 2023 can assist with overall cash flow and timing of tax payments for one year.

Items to consider for acceleration in 2022 or delay until 2023:

  • Sale transactions
  • Crystallizing losses to offset potential gains
  • Timing of dividend payments from your business
  • Charitable contributions of cash or appreciated securities (subject to individual AGI limits)

Considerations for Founder Shareholders of US Corporations Operating on a Calendar Year:

  • Write-off of business bad debts that are uncollectible
  • Pay out of year-end bonuses
  • Purchasing property and equipment qualifying for bonus depreciation

Key Takeaway:  Each individual situation is unique and dependent on the individual facts and circumstances. The nature and sourcing of the income alongside the taxpayer’s foreign tax credit position can impact the overall tax efficiency. Therefore, it is recommended that you consult with a US tax advisor.

Review of State Tax Positions of US Business Operations

 
State Income Tax Nexus

Businesses which operate in the US may be considered doing business (creating nexus) in certain States. This can be through in-State sales, property, employees, or contractors. The lack of a physical presence may not necessarily protect an overseas business from State income tax obligations. Many states and locales, including California and New York, have implemented economic nexus thresholds for income tax purposes. Sales over a certain threshold in a State or locale can trigger registration and filing obligations. Furthermore, foreign businesses who rely on the Federal tax treaty will not be protected for State tax purposes. Certain protection may be afforded depending on the nature of the business activities. In particular, businesses selling tangible goods. Internet based activities can also trigger nexus and should be reviewed.

State and Local Sales Tax

Sales tax, similar to VAT, is a separate tax assessed by States and locales on certain sales and services. Remote sellers can also trigger nexus depending on their activities. Sales tax nexus can be triggered at certain thresholds, generally $100K of sales, requiring registration and collection of sales tax. The tax is remitted to the State by filing sales tax returns. Businesses should review its activities by state and assess whether their services or products are taxable for sales tax purposes.


Key Takeaway: States are closely monitoring companies that sell or provide services into their State and assessing harsh penalties for non-compliance. Therefore, it is important to review the rules to determine if your business will trigger nexus for sales tax purposes. Everfair can assist in assessing the State tax exposure for your business.

Autumn Statement 2022

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With 2022 seeing record high inflation and the UK heading into recession, today’s Autumn Statement was always going to be a very tricky balancing act for our new PM Rishi Sunak and his Chancellor Jeremy Hunt.

With the previous mini budget resulting in market turmoil, followed by the subsequent reversal of most of the measures. There would understandably be a wish to tread carefully with today’s announcements. It had been confirmed in media rounds, undertaken by the Chancellor in the last few days, that taxes would need to rise to allow the country’s books to be balanced. But, there had been very few clear indications as to in what areas these rises may come and whether they would be direct or indirect taxation.

When the Chancellor finally stood up, the key announcements were as follows:

  • The threshold at which the 45p tax rate becomes payable to will reduce to £125,140 from April 2023. Higher earners can therefore expect to pay £1,200 more a year
  • The annual dividend allowance will fall from £2,000 to £1,000 from April 2023, and to £500 from April 2024
  • Similarly the Capital Gains Tax Annual Exempt Amount will reduce from £12,300 to £6,000 from April 2023 and then to £3,000 from April 2024.
  • The income tax personal allowance threshold will now be frozen until 2028, rather than 2026 as previously announced
  • Main National Insurance and inheritance tax thresholds will also be frozen for further a two years, until April 2028
  • Previously announced increases in various stamp duty thresholds will now only be temporary and end in March 2025
  • Electric cars will pay road tax from April 2025
  • Energy profits levy rises to 35% from 25% with effect from January 2023 and will apply until March 2028.
  • This levy is also being temporarily extended to electricity companies at a 45% rate
  • In a welcome move to help those with lower income state pension payments and means-tested and disability benefits have also been confirmed to increase by 10.1%, in line with inflation
  • UK national living wage for people over 23 to increase from £9.50 to £10.42 an hour from next April

There was a clear theme that larger companies and those with higher levels of income have the broadest shoulders, and therefore should bear a larger portion of the burden of increased taxes. This is no real surprise, given the way in which the mini budget proposal of abolishing the 45% rate of tax was received. In what is likely to come as a relief to many, the return of capital gains tax rates being linked to income tax rates that had been widely predicted did not come about.