If a taxpayer claims foreign tax credits on the ‘paid’ basis in the US, it may be necessary to accelerate UK/Foreign tax payments into the same calendar year as the income is reported. This will ensure that the income is aligned with the foreign tax credit in the same calendar year to avoid a situation whereby income and foreign tax credits are reportable in different tax years and tax is paid twice before a delay in reclaiming the US tax, affecting cashflow. In a worst case scenario the gap between income reporting and tax payment reporting exceeds one calendar year, which means no carry back is available (limited to one calendar year) and a genuine double taxation occurs.

Typically Prep payments of non US tax apply to the following:

• Arising basis (worldwide taxation) taxpayers
• Partners
• Self employed
• Taxpayers with large one off transactions within a tax year, without any withholding at source. (i.e. capital gain or carried interest income)

Under the US/UK double tax treaty generally the country of residence will have the primary taxing rights on income/capital gains (for US citizens), with a foreign tax credit available in the other jurisdiction (the US), however, this does not apply for US dividends, US real estate and potentially for pension payments in certain circumstances.

If in doubt, please reach out, as we can confirm if any year end planning is required and check your current situation versus available foreign tax credits.

The Transatlantic Move: Owner Managed Business Series 

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 US tax areas. It is not a comprehensive analysis or specific tax advice. They are based on the US 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 will examine general areas of consideration for a British business owner moving to the US. It will focus 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 1: Transatlantic Move: A US Tax Primer for the Uninitiated UK Business Owner Moving to the US

The first article in our series examines general areas of considerations for a British business owner moving to the US. This article focuses solely on individual tax matters. The remaining articles will focus on the tax matters of the business and the impacts on the business owner.

Transatlantic Move Article: Summary  

This article covers the potential US tax implications of a British National moving to the US, exploring the following areas: 

• When they will be deemed a US resident for tax purposes
• How they will be taxed
• Implications of selling or renting out their UK residence whilst living in the US
• Four potential pitfalls in relation to their UK investments and trusts

Year of Arrival

When will you become a US resident for tax purposes?

A non-US citizen/non-permanent resident (green card holder) becomes a US tax resident by meeting the substantial presence test.

You will meet this test in one of two scenarios:

1. You have spent greater than 183 days in the US during the calendar year (or)
2. You have spent at least 31 days in the US during the calendar year and

(Total days spent in the US in the current calendar year.) +

(1/3 of the days spent in the US in the prior calendar year.) +

(1/6 of the days spent in the US in the second prior calendar year.) = Greater than 183 days.

Dual Resident Status

Quite often, you may have dual status in the year of arrival. A dual status resident is a non-resident for part of the calendar year and a US resident for the remainder. You can elect to be treated as a resident for the entire calendar year if it is deemed beneficial.

When you are eligible, you may consider applying for permanent residency in the US by obtaining a green card. Whilst many consider this a document for immigration purposes, there are tax obligations for green card holders. The tax obligation does not cease after the expiration of the green card for immigration purposes. Even upon leaving the US, your tax obligation continues until you officially surrender your green card for tax purposes. This is satisfied by filing Form I-407 with the appropriate US agency. You may also be subject to an exit tax at the time of surrender. The tax is dependent upon the length of time you held the green card, should one of the following apply:

1. Your net worth exceeds the threshold, currently $2M.
2. You failed to comply with all US tax obligations in the five years prior to surrender.
3. Your average annual income tax in the five years prior to surrender exceeds the specified amount for the year. ($178,000 for 2022.)

How will you be taxed?

You are deemed a US resident for tax purposes once you meet the substantial presence test. Your worldwide income, gains and assets will be subject to US tax and annual reporting on a calendar year basis.

The US tax system operates at two levels – Federal and State. Each state governs with their own set of tax laws and tax rates. A US resident is taxed at graduated rates of up to 37% for Federal income tax purposes. Qualifying dividends and capital gains on assets held for more than one year are taxed at rates up to 20%. A further surtax of 3.8% may be assessable on your net investment income should you exceed the applicable threshold. Unlike the UK, it is possible to file a joint tax filing with your spouse.

You may also be subject to state tax on your worldwide income and gains in the state where you reside. If working, conducting business, or receiving income from property in another state, you may also be taxed in that state. State income tax rates vary from 0% to 13.3%. In certain states, such as New York, an additional city or regional tax may also apply.

For any period of non-residence, you will only be subject to US tax on your US sourced income. This can include dividends received from a US company or income received from a US-situs property. Tax may be assessable at fixed or graduated rates of up to 37% for Federal tax purposes on certain income. It may also be subject to state tax at graduated rates of up to 13.3%.

Your Home in the UK – Selling vs Renting

Selling or renting out your home in the UK as a US resident will be reportable for US tax purposes. Income or gains will need to be converted to USD and therefore subject to currency fluctuations. Gain on the sale of your main residence may not receive full tax relief as generally afforded in the UK. The exemption allowance in the US as a single filer is $250K or $500K as a joint filer. To qualify, you must satisfy the ownership and residence period of 2 out of 5 years prior to the sale. Otherwise, the entire gain is likely to be taxable at 23.8%. Therefore, you may consider selling your home prior to moving to the US if you have substantial gains to recognize.

Alternatively, you may choose to rent out your home whilst you are living in the US. Certain expenses associated with the rental of your home, including depreciation and mortgage interest, can be deducted. Tax paid to HMRC on the rental income during the calendar year is eligible to offset the Federal tax due. As states generally disallow credits for taxes paid to a foreign country, you may be subject to state tax.

Four Potential Pitfalls of a Transatlantic Move:

1 – UK ISA

ISAs enjoy tax-free status in the UK but are not afforded the same treatment for US tax purposes. Any income or gains realised in the accounts are reportable as a US resident. Furthermore, ISAs holding non-US unit trusts or funds will be subject to a punitive taxing regime in the US. These non-US pooled investment vehicles are commonly referred to as Passive Foreign Investment Companies (PFICs) for US tax purposes. It is similar to, but more onerous than the Offshore Income Gain regime in the UK. Therefore, we advise reviewing your investment portfolio prior to your move to the US with a US tax specialist.

2 – Beneficiary of a UK Trust

US resident beneficiaries of certain types of trusts established outside the US can be attributed income from trust investments. Even if no distributions are made, trust investments in PFICs, as mentioned above, can cause adverse tax implications. Therefore, beneficiaries of any non-US trusts should consult with a US tax trust specialist prior to moving to the US.

3 – Receiving Distributions from a UK Trust

US residents receiving distributions from certain types of trusts established outside the US may encounter a punitive taxing regime. Distributions which are deemed to represent accumulated trust income or gains can have complex and adverse US tax implications. Therefore, beneficiaries of any non-US trusts should consult with a US tax trust specialist prior to moving to the US.

4 – Acting as a Trustee/Executor

US resident trustees or executors of a UK trust or estate may potentially affect the trust or estate’s tax residence. This can have significant tax implications, dependent on the circumstances. Therefore, we recommend that you review any current or potential appointments prior to moving to the US.

The Transatlantic Move: Key Takeaway:

The above does not cover every situation that you may encounter upon moving to the US from a tax perspective. However, it highlights the importance of reviewing your overall financial affairs with a US tax specialist prior to your move. This will ensure that any areas of potential risk and exposure to punitive taxing regimes 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 next article in this owner managed business series. Article 2 will delve into the tax issues of conducting business in the US with an established UK business.

Main Takeaways

Starting the tenure of the new PM Liz Truss, and his own, with a bit of a bang, the Chancellor Kwasi Kwarteng this morning delivered what was originally labelled a mini-budget.

The policy changes announced really weren’t so mini after all, as they included some big tax cuts as part of what was described in follow up documents as the Government’s Growth Plan for the economy and the country.

For individuals there is a drop in the basic rate of income tax by 1p to 19p and the abolition of the 45% tax rate on income over £150,000 from April 2023.

Less surprisingly, the 1.25% heath and social care level applicable to dividend income is to be cancelled from 6 April 2023.

The level at which house-buyers begin to pay stamp duty also doubles from £125,000 to £250,000 and first-time buyers will pay no stamp duty on homes worth £450,000, up from £300,000, effective from today.

To support businesses and encourage investment and growth, the planned rise on corporation tax from 19% to 25% is scrapped and the 1.25% rise in National Insurance is to be reversed from 6 November. Alongside this, the government announced they will make permanent the temporary £1 million level of the Annual Investment Allowance (AIA), which was due to expire after 31 March 2023. This means businesses can deduct 100% of the costs of qualifying plant and machinery up to £1 million in the first year.

In a move likely to be welcomed by entrepreneurs and investors, the government restated its commitment to the Enterprise Investment Scheme beyond it’s currently stated end date of March 2025 and made a number of changes to the Seed Enterprise Investment Scheme (SEIS). For SEIS eligibility the company will now have to have been trading for less than three years compared to the previous two and will be able to have net assets of up to £350,000 instead of £250,000. The amount a company can raise through SEIS has increased to £250,000 from £150,000 and the individual investor limit has been increased from £100,000 to £200,000. The limit on the values of shares that can be held by an employee under Company Share Option Plans (CSOP) was doubled from £30,000 to £60,000.

The off payroll working rules for both public and private sector worker which extended the reach of IR35 will no longer be in place from April 2023, allowing a return to a situation where those working through personal service companies to determine their own employment or self employment status. This is likely to be a welcome reduction in administration for companies using consultants who operate in this way.

Perhaps controversially, a cap on bankers’ bonuses, which limited rewards to twice the salary level, was also axed.

This is all on top of the originally announced plan to subsidise both domestic and business energy bills which will cost £60bn for the next six months.

These tax cuts will come at a high cost, especially as there was also a commitment to maintain the investment in the NHS at the level expected to be funded by the Health and Social Care Levy.  The Chancellor however clearly believes that the borrowing will be worth it, amidst the landscape of high inflation and its impact on the cost of living and in time he hopes these changes will provide to be the right way to stimulate growth.

Pandemic penalty relief recently announced by the IRS

On August 24^th, the IRS announced they will not assess late filing penalties for certain 2019 & 2020 returns. To receive penalty relief, the returns and certain qualifying informational filings need to be filed by September 30^th. For those who have already been assessed and paid the penalty, they will be due a refund. There is no need to call or make a formal request – it will be automatic.  

This is an effort to provide pandemic relief to taxpayers who have experienced unprecedented processing delays due to the backlog. The pandemic backlog has made it nearly impossible to reach a live agent and responses to IRS correspondence remain unanswered. Taxpayers and their advisors have been left unable to discuss, let alone resolve outstanding tax matters, causing undue hardship.

Summary of the IRS Backlog

There have been unprecedented processing delays at the IRS due to a pandemic backlog. Correspondence from pre-pandemic remains unanswered, exacerbated by a lack of updates or live telephone support. This has left taxpayers and advisors unable to resolve outstanding tax matters. National groups have called for increased transparency and communication from the IRS.

An aggressive plan was announced earlier this year to combat the IRS backlog by the end of the year. Mid-year reports indicate the IRS is still overwhelmed by the backlog. However, in recent developments, the IRS will receive $79.6B of much needed funding for overhaul and modernization. It should afford the IRS the resources needed to increase operational efficiency and reduce the current backlog. The IRS also announced pandemic penalty relief for certain late filed returns relating to the 2019 and 2020 tax years.

See below link for the IRS press release:

https://www.irs.gov/newsroom/covid-tax-relief-irs-provides-broad-based-penalty-relief-for-certain-2019-and-2020-returns-due-to-the-pandemic-1-point-2-billion-in-penalties-being-refunded-to-1-point-6-million-taxpayers

Is there a Plan to Tackle the IRS Backlog?

A lack of funding since 2010, coupled with the pandemic, has piled on additional inventory in an already overloaded system. A 15-fold increase at the start of the year, from the normal backlog of below 1 million, was reported. The US Treasury announced in March that there was an aggressive plan to end the IRS backlog this year.

What is the Plan?

IRS Commissioner Charles Rettig outlined the following plan to confront the backlog:

Aggressive Hiring and Creation of Surge Teams to Combat the Backlog

The IRS will hire thousands of new employees and contract workers across departments to provide immediate support in critical areas. Mandatory overtime and surge teams have already been implemented to combat backlog in critical areas. These areas include taxpayer correspondence, paper filed tax returns and amended returns.

Expanding Taxpayer Services Online and Implementing Call Back Services

The IRS has increased the services available on their online taxpayer portals. Taxpayers can securely access their tax history and notices through their online account. Call back services have been implemented on more toll-free numbers to save hours of wait time for taxpayers.

Implementing Modernized Technology

The IRS will employ automated tools such as scanning technology to allow the agency to exponentially increase their processing capabilities. This will allow millions of cases to be processed per week vs thousand when processed manually. The IRS will also reduce its inventory of notices by temporarily halting certain automated letters. This will allow time for the processing of backlogged taxpayer correspondence.

Is the Plan Working?

Unsurprisingly, the initial mid-year reports from independent agencies such as the National Taxpayer Advocate are not promising. It reports the IRS continues to be overwhelmed by the backlog, causing continued hardship for taxpayers. In response, national groups such as the AICPA, have called for increased transparency and communication from the IRS. In recent developments, the passing of the Inflation Reduction Act will inject $79.6B to overhaul and modernize the IRS. This should provide the financial resources needed to implement technologies to increase operational efficiency and reduce the current backlog.

The IRS also announced on August 24^th that they will not assess late filing penalties for certain 2019 & 2020 returns. To receive penalty relief, the returns and certain qualifying informational filings need to be filed by September 30^th. For those who have already been assessed and paid the penalty, they will be due a refund. There is no need to call or make a formal request – it will be automatic. This is one step in acknowledging the hardship that taxpayers have faced in the aftermath of the pandemic.

Our Takeaway on the IRS Backlog

Whilst this plan may help relieve some immediate pressure points, there is a long way to go. The structural damage from the historical lack of funding and resources will take more time and money to resolve. The lack of transparency and real-time updates is causing undue stress to taxpayers and their advisors. The recently passed Inflation Reduction Act should help provide crucial funding needed by the IRS. The pandemic penalty relief is a welcome announcement, but further action is needed. We will continue to support and work with our clients during this unprecedented and difficult period.

Written by Sara Kim

Estate Planning Options

Clients often ask us whether they should set up Family Investment Companies as part of their estate plans. We have therefore set out below the main points to consider when determining whether this is a suitable structure for your specific circumstances. 

Key takeaways

• Family Investment Companies can be very efficient estate planning vehicles. Especially where there are income and realised capital gains not needed. These can be reinvested into the company, where they can be funded without triggering significant capital gains tax liabilities
• This allows flexibility for the amount, originally used to fund the company, to be retained and accessed if needed. Income can also still be received but future growth in the assets would be outside the scope of inheritance tax
• If all the income and gains realised by the company are distributed to the shareholders there may be an overall higher level of tax on these amounts
• Company administration costs also need to be taken into account.
• There are other structures such as a family limited partnership which should be considered in case these are more appropriate.

Why choose a family investment company

There are a number of benefits arising from setting up a Family Investment Company as part of an estate planning strategy. The largest is perhaps that future growth in the value of the assets transferred could be immediately outside your estate for inheritance tax. There is the flexibility to access the original amount with which the company was funded should you need it. There is also the ability to retain access to the income during your lifetime if you wished to do so. Another welcomed element is the ability to retain some control over the assets by the appointment of directors – including yourself. This allows the assets to be passed in a way that you are happy with.

How does it work?

Achieve the above benefits through the following:

• If the company is funded by way of loan and none of the shares in the company are held by you, then you have no interest in the company and its value can’t be in their estate. 
• If the initial funding is done by way of loan, you can access the amount the company is funded with by recalling the loan.
• If you wish to retain the income during your lifetime, you can also have two classes of shares. One of which has a right to income. The other one has the rights to assets on a winding up. As the income shares generally cease to exist when you pass away, they would have no value on your death.

Other things to consider when deciding if family investment companies are right for you

Funding of the company can trigger immediate capital gains if not done in cash. This should be balanced against the benefits outlined above. This is because transferring an asset to the company is considered to be a disposal at market value for capital gains tax purposes. Importantly, the charge arises with no cash changing hands to fund it. If more than one person is providing assets and becoming a shareholder, you may have more than one annual capital gains tax exemption of £12,300 to reduce the amount payable. There may also be capital losses which can be used to lessen the impact.

It’s also important to consider if income and realised capital gains generated by the company are needed on an annual basis. The company pays corporation tax at 19%. However, there would be additional tax paid at up to 39.35% on any dividend distribution to the shareholders. This can result in a relatively high overall level of tax being paid.

There are other costs of administering a company to consider. Such as annual accounts, corporation tax returns, and companies house filings to be completed each year.

As a result of the above, it would be worth looking at other structures such as a family limited partnership. It would be worth seeing if these can achieve the same core objectives, but be more appropriate from an income, capital gains tax and administrative perspective in your circumstances.

For Separating Spouses or Civil Partners

HMRC have announced suggested changes to the capital gains tax position on the transfer of assets between spouses going through a divorce. The intention is to make fairer the rules that apply to spouses and civil partners who are in the process of separating. This follows on from the OTS report into how capital gains tax can be simplified. The main proposals are as follows:

• separating spouses or civil partners to be given up to three years after the year they cease to live together in which to make no gain or no loss transfers
• no gain or no loss treatment will also apply to assets that separating spouses or civil partners transfer between themselves as part of a formal divorce agreement
• a spouse or civil partner who retains an interest in the former matrimonial home to be given an option to claim Private Residence Relief (PRR) when it is sold
• individuals who have transferred their interest in the former matrimonial home to their ex-spouse or civil partner and are entitled to receive a percentage of the proceeds when that home is eventually sold, be able to apply the same tax treatment to those proceeds when received that applied when they transferred their original interest in the home to their ex-spouse or civil partner

For US taxpayers, it is important to also consider the US tax rules relating to divorce which remain unchanged.  Generally, for US purposes no gain or loss is recognized on a transfer of property to a spouse within 12 months of the end of the marriage or when the transfer is incident to the divorce.  A transfer is typically considered to be incident to a divorce if it is made pursuant to a divorce decree and occurs within 6 years of the cessation of the marriage.  This rule does not apply where the former spouse is a non-resident alien.

We will keep you updated on these changes, if and when they come into effect.

For more information on Capital Gains Tax, read our expertise page.

‘innovator, fresh ideas & exemplary leadership’

Finance Monthly announced their full list of winners of their 2022 Finance Monthly Taxation Awards. We’re thrilled to have won! We have been recognised as:

an innovator in our field, bringing fresh ideas and exemplary leadership that have stood (us) apart in an already competitive market

FM Taxation Awards

Gillian Everall has been awarded International Tax Services Advisor of the Year 2022

Few sectors are more integral to the finance landscape than tax. Financial services depend on the diligence of experts in tax litigation, corporate tax, indirect tax, transfer pricing and many other fields besides to deliver value, and the work of tax experts can have an impact that is felt across the entire business world.

In recognition of valued tax professionals, the Finance Monthly Taxation Awards seeks out talent in the crucial sector of tax and celebrates it, year on year.

The 2022 Awards publication includes profiles and interviews with these stand-out winners, drawn from a broad range of sectors and nationalities.

Congratulations to all of our peers and fellow winners.