Everfair Tax

Specialists in UK, US and Expatriate Tax.

How to Avoid Double Taxation in the UK and US

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Navigating the intricacies of international taxation can be challenging, particularly for individuals earning income in both the United Kingdom and the United States. Without proper planning and understanding, one can easily fall victim to double taxation, where the same income is taxed by both countries. Here’s out guide on how to avoid this pitfall.

1. Understanding Tax Residency

  • UK Tax Residency: In the UK, tax residency is determined by the Statutory Residence Test (SRT). Key factors include the number of days spent in the UK, ties to the country, and employment status.
  • US Tax Residency: The US taxes its citizens and permanent residents (Green Card holders) on worldwide income regardless of where they live. Non-residents are taxed only on US-source income.

2. Utilising the US-UK Tax Treaty

  • The US-UK Tax Treaty is a pivotal document that helps prevent double taxation. It outlines which country has the taxing right over specific types of income.
  • Article 4 (Residence): This article provides tie-breaker rules for determining the residency of an individual if both countries consider the person a resident.
  • Article 24 (Relief from Double Taxation): This ensures that if income is taxed in both countries, one will provide a credit or exemption to mitigate the burden.

3. Foreign Tax Credits

  • US Taxpayers: Americans can claim the Foreign Tax Credit (FTC) on their US tax returns. This credit reduces US taxes owed by the amount of tax paid to the UK on the same income.
  • UK Taxpayers: The UK allows for a credit or deduction for foreign taxes paid. This helps reduce the overall tax liability in the UK.

4. Income Exclusion and Deductions

  • Foreign Earned Income Exclusion (FEIE): US citizens living and working abroad might qualify to exclude a portion of their foreign earned income from US taxation (up to a certain threshold, adjusted annually).
  • Foreign Housing Exclusion/Deduction: In addition to the FEIE, US taxpayers can exclude or deduct certain housing expenses incurred while living abroad.

5. Strategic Income Allocation

  • Source of Income: Properly determining the source of income can influence which country taxes it. For instance, rental income from a UK property is generally considered UK-source and primarily taxed there.
  • Income Timing: Timing the recognition of income and deductions can also be beneficial. For example, ensuring that income falls within a tax year where lower rates apply or when you can maximise foreign tax credits.

6. Professional Tax Planning and Compliance

  • Engaging a tax advisor knowledgeable in both UK and US tax laws is crucial. They can provide tailored advice, ensure compliance with filing requirements, and optimise tax positions.
  • Timely Filings: Adhering to tax filing deadlines in both countries is essential to avoid penalties and interest.

7. Retirement Contributions

  • Contributions to retirement plans can have different tax treatments in each country. The US-UK Tax Treaty provides specific provisions to avoid double taxation on pensions and retirement accounts.

Conclusion

Avoiding double taxation between the UK and US requires a thorough understanding of both tax systems and strategic planning. Utilising tax treaties, credits, exclusions, and professional guidance can help mitigate the risk and ensure compliance. By carefully navigating these complexities, individuals can optimise their tax liabilities and avoid the financial burden of being taxed twice on the same income. If you need any help navigating this, please get in touch.

Retirement Planning: Tax-Efficient Strategies for the US and UK

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Introduction

One of the most crucial aspects of retirement planning is ensuring tax efficiency. Tax-efficient strategies can significantly enhance retirement savings, providing more financial security during retirement years. This article delves into tax-efficient retirement planning strategies for individuals in the United States and the United Kingdom.

Tax-Efficient Strategies in the US

1. Maximizing Contributions to Tax-Advantaged Accounts

401(k) Plans:

  • Employer-Sponsored Plans: Contributing to a 401(k) plan allows for pre-tax contributions, which reduce taxable income. For 2025, the contribution limit is $23,500, with an additional catch-up contribution of $7,500 for those aged 50 and older.
  • Roth 401(k): Post-tax contributions are made, but withdrawals during retirement are tax-free, provided certain conditions are met.

IRAs (Individual Retirement Accounts):

  • Traditional IRA: Contributions may be tax-deductible, and investments grow tax-deferred. The 2025 contribution limit is $7,000, with a $1,000 catch-up contribution for individuals 50 and older.
  • Roth IRA: Contributions are made with after-tax dollars, but qualified distributions are tax-free. There are income limits for contributions, making it crucial to plan accordingly.

2. Health Savings Accounts (HSAs)

HSAs are triple tax-advantaged accounts that can be used for medical expenses. Contributions are tax-deductible, growth is tax-free, and withdrawals for qualified medical expenses are also tax-free. The 2025 limits for HSAs are $4,300 for individuals and $8,550 for families. Post-65, HSAs can be used for non-medical expenses without penalty, but they will be taxed as income.

3. Tax-Efficient Withdrawal Strategies

Roth Conversion:

  • Gradually converting a traditional IRA to a Roth IRA can spread the tax burden over several years, potentially lowering the overall tax rate during retirement.

Required Minimum Distributions (RMDs):

  • Starting at age 73, retirees must take RMDs from their traditional IRAs and 401(k)s. Planning withdrawals in a tax-efficient manner can help manage tax liabilities.

Tax-Efficient Strategies in the UK

1. Maximizing Contributions to Tax-Advantaged Accounts

Pension Contributions:

  • Personal Pensions: Contributions are tax-deductible, and investments grow tax-free. In the fiscal years for 2024/25 and 2025/26, the annual allowance is £60,000, with potential carry forward of unused allowances from the previous three years.
  • Workplace Pensions: Employer contributions are often matched, providing a significant boost to retirement savings.

Individual Savings Accounts (ISAs):

  • Contributions to ISAs are made with after-tax income, but all growth and withdrawals are tax-free. The annual ISA limit for the fiscal year 2024/25 and 2025/26 is £20,000.

2. National Insurance and State Pension

Understanding how National Insurance contributions affect State Pension entitlements is vital. Ensuring sufficient qualifying years can maximise the State Pension amount, providing a foundational income during retirement.

3. Tax-Efficient Withdrawal Strategies

Drawdown Strategy:

  • Tax-Free Lump Sum: Up to 25% of the pension pot can be taken as a tax-free lump sum.
  • Flexi-Access Drawdown: Allows for flexible withdrawals from the remaining pension pot. Managing the drawdown amounts can help stay within lower tax brackets.

Annuities:

  • Annuities can provide a guaranteed income for life, and their taxation depends on the type of annuity purchased. They can be a tax-efficient way to manage longevity risk.

Cross-Border Considerations

For individuals with ties to both the US and the UK, cross-border retirement planning is complex. Double taxation treaties and understanding the interaction between US and UK tax laws are crucial. Seeking advice from a tax advisor familiar with both jurisdictions can optimise tax efficiency and ensure compliance with both tax systems.

Conclusion

By leveraging the specific tax benefits in the US and UK, individuals can enhance their retirement savings and reduce their tax liabilities, ensuring a more secure financial future. Effective retirement planning requires a deep understanding of available tax-advantaged accounts, strategic contributions, and withdrawals. If you need any assistance with this, do get in touch.

2024 Autumn Budget – Inheritance Tax

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Summary of Changes for IHT; Individuals and Offshore trusts

The current non-domicile tax regime, including the remittance basis of taxation, will be abolished from 6 April 2025.  It will be replaced by a new “residence based” approach.  This note focuses on how the changes affect inheritance tax (“IHT”).  Separate notes consider the impact on income tax and capital gains tax for individuals and offshore trusts.

Inheritance tax – Individuals

It has been confirmed that the basis for IHT on non-UK assets will change from domicile-based to residence-based from 6 April 2025.  The impact for individuals is summarised below:

  • The term domicile will be replaced by long-term residence.
  • The basic premise will be that an individual will be a long-term resident for a tax year if they have been UK resident for 10 out of the previous 20 UK tax years.
  • Long-term residence will end after a run of consecutive tax years of non-UK residence varying from three to 10 tax years depending on the number of years of prior UK residence.
  • The test resets after 10 consecutive years of non-UK residence.
  • There is transitional protection for non-domiciles who would otherwise be long-term resident but left the UK before 30 October 2024 and who remain non-UK resident.
  • Residence for a tax year is based on being resident for all or part of the year under the Statutory Residence Test.
  • Lifetime gifts of non-UK assets by long-tern non-residents remain outside the scope of IHT even if long-term resident on death within seven years.

Inheritance tax – Offshore trusts

It is with regard to IHT and offshore trusts, particularly so-called excluded property trusts, where there was thought to be the biggest divergence between Labour and the Conservatives and the budget confirmed this was the case.

Under current rules an excluded property trust is a trust set up by a non-UK domiciliary which only holds non-UK assets so that it is outside the scope of IHT.  This treatment generally continues regardless of changes in the settlor’s domicile so can be used as a long term IHT mitigation tool.

The position for offshore trusts from 6 April 2025 builds on the changes for individuals:

  • Rather than being fixed at creation, the scope of a trust’s exposure to IHT on non-UK assets will change with the settlor’s personal IHT status before being finally fixed based on their status at death.
  • Broadly speaking, a trust’s non-UK assets will be within the scope of IHT for periods where the settlor is a long-term resident with charges arising when relevant events occur.

2024 Autumn Budget – Offshore Trusts

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Summary of Changes for Offshore Trusts

The current non-domicile tax regime, including the remittance basis of taxation, will be abolished from 6 April 2025.  It will be replaced by a new “residence based” approach.  This note focuses on how the changes affect offshore trusts.  Separate notes consider the impact on income tax and capital gains tax (“CGT”) for individuals and inheritance tax.

Income tax and capital gains tax for offshore trusts

The main income tax and CGT changes that affect offshore trusts from 6 April 2025 are:

  1. the abolishment of the remittance basis and replacement with a new system based around a four year exemption for foreign income and gains (“FIG regime”) if tax residency conditions are met;
  • a three-year temporary repatriation facility (“TRF”) allowing previously unremitted income and gains to be remitted at a tax rate as low as 12%; and
  • the abolishment of settlor-interested offshore trust protections.

FIG regime

The FIG regime will be able to be used to exempt foreign income and gains in the following offshore trust situations:

  1. Those assessed on the settlor under settlor-interested rules.
  • Those matched to discretionary distributions received by settlors and beneficiaries.
  • The foreign income element assessed on an interest in possession beneficiary.

Foreign income and gains received by the trust during years covered by the FIG regime may still be taxed in later years if matched to a distribution.

TRF

The TRF will be able to be used to reduce the tax on foreign income and gains in the following offshore trust situations:

  1. Those matched to settlors and beneficiaries pre-6 April 2025 but not taxed as a result of the remittance basis.
  • Pre-6 April 2025 foreign income and gains matched to distributions received during the TRF window.

Settlor-interested offshore trust protections

Settlor-interested offshore trust protections currently mean that, where certain conditions are met, settlors are only assessable on foreign income and gains when distributions are received.  The abolishment of these protections will mean that the settlor of such a trust will become liable to all income and gains of such trusts as they arise.  The settlor will, however, be able to recover the tax from the trust.

  • For settlor-interested trusts, gift with reservation of benefit rules will also apply meaning that the non-UK assets are also included in the settlor’s estate while they are a long-term resident (though there are exceptions to this for trusts which were excluded property trusts on 30 October 2024).
  • There will be an additional test for certain interest in possession trusts based on the beneficiary’s long-term residence position such that the trust will be exposed to IHT on non-UK assets whenever either the settlor or beneficiary are a long-term resident.

2024 Autumn Budget – Income Tax and Capital Gains Tax

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Summary of Changes for Income Tax and Capital Gains Tax Affecting Individuals

The current non-domicile tax regime, including the remittance basis of taxation, will be abolished from 6 April 2025.  It will be replaced by a new “residence based” approach.  This note focuses on how the changes affect income tax and capital gains tax (“CGT”) for individuals.  Separate notes consider the impact on inheritance tax and offshore trusts.

New Residence Regime

From 6 April 2025 all UK residents will be taxed on the arising basis (worldwide income and gains), however, for individuals who have previously been non-resident for 10 years, a new regime will be available for the first 4 years of residence as determined by the statutory residence test).

In those 4 years, a taxpayer can claim to exempt from tax the foreign income and gains (“FIG”) arising.  A claim will need to be made each year and can include either or both foreign income and/or gains.  Unlike under the remittance basis regime currently in place, there will be no requirement to retain the exempted FIG outside of the UK, and the FIG can be brought into the UK in the same or future tax years.

Temporary Repatriation Facility

From 6 April 2025, a new temporary repatriation facility (“TRF”) will be introduced to encourage taxpayers to bring funds into the UK in respect of FIG that were not taxed in the UK in previous years as a result of a claim for the remittance basis.

Whereas before 6 April 2025, a remittance of such funds to the UK would attract an income tax charge of up to 45%, the TRF will allow taxpayers to designate FIG and be subject to a tax rate of 15% in the 2025/26 and 2026/27 tax years, and 15% in the 2027/28 year.  Once designated and the charge paid, the funds can be brought into the UK at any time, including after the TRF period of 3 years has finished.

Overseas Workday Relief

Currently, overseas workday relief (“OWR”) is available in the first 3 years of tax residence to resident but non-domiciled employees on overseas earnings (i.e. days worked outside of the UK as part of their employment) paid and kept outside of the UK. 

From 6 April 2025, with the ending of the non-domicile regime, the relief will be available for the first 4 years of residence.  As a key development, there will no longer be a requirement to retain the earnings offshore and so the relief will also be available for those who are paid into a UK bank account, or just want to use the earnings in the UK.

For the first time, OWR will have a limit on the amount to be claimed in each tax year.  The limit will be the lower of 30% of the employment income or £300,000, although the limit will not apply to those who are already claiming OWR by 5 April 2025 and are able to continue to claim in 2025/26 or a later tax year.

Capital Gains Tax Rebasing

UK resident taxpayers who are unable to use the new 4 year FIG regime outlined above, will be subject to CGT on foreign gains.

However, as a transition measure, and subject to conditions, those who have claimed the remittance basis by 5 April 2025, will be entitled to rebase foreign assets for CGT purposes to their market value at 5 April 2017.

The transitional measure is not available for those who have been UK domiciled or deemed domiciled in the UK prior to 6 April 2025.

CGT Rates

The CGT rates on all disposals (aligning with those previously in place for residential property) are now 18% for basic rate taxpayers and 24% for higher and additional rate taxpayers, with the new rates coming into effect on Budget Day.

Where a claim for business asset disposal relief (“BADR”) is possible on a disposal after 6 April 2026, the rate is increasing from 10% to 14%.  The lifetime allowance will remain at £1m. 

The same rates of tax applicable where a claim for investors relief is available (on certain unquoted trading companies), although for investors relief there is a reduction in the lifetime allowance to £1m (previously £10m).

For those subject to CGT in respect of carried interest, the CGT rates are increasing to 32% from 6 April 2025.

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

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.

Taxation of Cryptocurrency

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What is cryptocurrency?

Cryptocurrency is a form of digital currency, which can be purchased in a variety of means; from exchange platforms such as Coinbase and Kraken, to some online banking platforms.

With the ever-growing nature of cryptocurrencies there will always be a new form or version of digital currency, such as NFTs. Some of the most well-known are: Bitcoin, Ethereum, Ripple and Luna – which has been hitting headlines for the losses it has created earlier this year.

Income Tax vs Capital Gains Tax

From a taxation perspective, cryptocurrency can be subject to both income and/or capital gains tax. The type of tax depends on the nature of how the income arises.

Both HMRC and the IRS have similar conditions in relation to when income tax is relevant to cryptocurrency.

If cryptocurrency is received as a payment for goods or services or could be considered a trade, under the badges of trade rules in the UK, its likely that it will be treated as self-employment income and liable to income tax rates and relevant national insurance contributions, or social security in the US.

If your cryptocurrency ownership is an investment, as opposed to a trade/earned income, then its likely treatment upon sale will be capital gains tax.

HMRC and the IRS have similar rules in relation to the sale of cryptocurrency outside of a trade/earned income. Capital gains tax will arise if the following disposals are made:

  • Selling cryptocurrency for any government issued currency, i.e. GBP, USD, EUR etc.
  • Trading cryptocurrency for another cryptocurrency or stablecoins; a digital currency pegged to a reserve asset such as GBP or USD
  • Spending cryptocurrency on goods and services, i.e. coffee/lunch
  • Gifting cryptocurrency

What about losses and how I can use them?

For those who have invested in assets/coins such as Luna and have experienced heavy losses, there are ways to utilise these against gains/other income.

The nature of the loss will dictate what it can be offset against, capital losses can be offset against capital gains, trade related losses have specific rules in the US and UK.

In both the US and UK, capital losses can be offset against gains in the same year, in theory reducing these to zero (or up the annual exemption in the UK). For US purposes, it is also possible to offset up to $1,500 against other income sources depending on your filing status and the amount of loss available/nature of loss (passive vs non passive). Any unused losses will generally be carried forward to use against future gains.

For Trade related losses, in the UK/US these are available to offset against other non-trade related income, however the concept of ‘worthless’ stock/shares could impact your ability to claim a loss. Luna as an example is worth practically nothing, but is not worthless, so would need to be sold to realise a loss.

Conclusion 

From both the UK and US tax perspectives, the nature of the transaction will determine whether or not a taxpayer will pay income or capital gains tax.

With the growing emergence of cryptocurrency, both HMRC and the IRS are taking steps to track cryptocurrency to ensure correct reporting.

HMRC now have a data sharing program with all UK exchanges and through this has transaction data dating from 2014 to the present. Letters to investors regarding reporting and payment of taxes is a matter of when rather than if.

The IRS has also enforced that all major exchanges must complete Know Your Customer (KYC) checks. This is as a result of the IRS winning court cases with the likes of Coinbase and Kraken, forcing them to share customer data. Taxpayers and the IRS will also begin receiving 1099 Forms which will indicate income earned and any taxes paid. Exchanges such as Coinbase will send its US customers 1099-MISC forms where there are crypto gains of over $600, and the individual is a US customer.

UK Spring Budget 2022

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The Chancellor Rishi Sunak delivered todays Spring budget under the backdrop of inflation being revealed to have risen to 6.2%. The highest rate of inflation for 30 years. This had been made worse by rising fuel prices and will result in significant increases to the cost of living. There is also recognition of the situation in the Ukraine. The impact the ongoing conflict may have, as well as the relatively slow growth being seen in our own economy. In addition to the need to reduce the level of debt built up during the last two years to fund COVID measures.

Inflation, Growth and Debt Repayments

To make his point, during his statement the Chancellor referenced these cumbersome estimates from the Office for Budget Responsibility on inflation, growth and debt repayments.

  • Inflation forecast to average 7.4% this year
  • UK growth expectation downgraded to 3.8% this year
  • UK to spend £83bn on debt interest in the next year

In line with the relatively low expectations of change ahead of today’s announcement, there were relatively small immediately effective measures to ease the burden of the cost of living were set out. There was however the promise of a 1% cut in income tax rates before the end of the current parliament in 2024 first cut to the basic rate of income tax in 16 years – from 20% to 19% – by the end of Parliament in 2024

Despite the economic picture painted and other indications given in advance as to the limited ability to make sweeping cuts that would have an immediate impact a shout of ‘is that it?!’ could clearly be heard from the Labour benches and there has been disappointment expressed at the fact that the proposed heath and social care level and subsequent NI rate increase were not scrapped as had been hoped for.

What you need to know

Here therefore are the key take aways from today’s Statement:

  • A cut to the basic rate of income tax. From 20% to 19% – by the end of Parliament in 2024
  • Fuel duty will be cut by 5p a litre from 18:00 GMT until March 2023
  • The National Insurance threshold will be raised by £3,000. Meaning people must earn £12,570 per year before paying income tax or NI. It’s a tax cut for 30 million people worth over £330 a year, says Sunak
  • VAT will be scrapped on home energy-saving measures such as insulation, solar panels and heat pumps
  • The Household Support Fund for local councils to help the most vulnerable will be doubled to £1bn from April
  • Retail hospitality and leisure sectors will have a 50% discount in business rates up to £110,000
  • Employment Allowance will increase to £5,000. Claiming it is a tax cut worth up to £1,000 for half a million small businesses.

US Tax Reform Update

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Tax Reform Under The Biden Administration

US tax reform under the Biden administration remains very much a moving target. Therefore, it is something on which we can provide little in the way of definitive guidance.  However, it is perhaps worth a reminder of the current state of affairs, insofar as it might impact US taxpayers living overseas.

It is fair to say that many of the proposals originally put forward have been heavily diluted, or dismissed altogether. There are still some key points worth noting. 

Income Tax Rates

The Biden tax plans proposed an increase in the top rate of Federal income tax from 37% to 39.6%. Reverting to the situation as it was before former President Trump’s tax reforms.  This increase is not included in the bill passed by the House of Representatives.

There were also proposals to increase in the rate of tax applied to long term capital gains, which have not made it into the final bill passed by the House.

For most taxpayers, this means that there will be no significant change to the tax rates applicable to them.

Surtax

Despite the removal of the proposed changes to tax rates, the House bill does contain a provision imposing a 5% surtax levied on an individual’s income in excess of $10m. ($5m for married persons filing separately, $200,000 for an estate or trust.) Plus, an additional 3% on income in excess of $25m. ($12.5m for married persons filing separately, $500,000 for an estate or trust.)

This proposal creates a tax charge, which is unlikely to be offset by credits for foreign taxes paid. Thus, would result in a genuine double-taxation issue.

Foreign Tax Credits

One change included in the House bill, which will be of considerable significance to US taxpayers living overseas, is a proposal to scrap the carryback of excess foreign taxes effective for tax years beginning after December 31, 2022. 

Under current rules, if a taxpayer has paid more foreign tax than they are able to utilise for a tax year, they are able to carry the excess back to the previous year if there is scope to make use of those taxes in that year.

If the bill does pass in a form which contains the withdrawal of the carryback provision, it will mean a renewed focus for US taxpayers overseas to carefully plan the timing of their foreign tax payments to prevent unwanted double taxation problems.

State and Local Tax

The House bill does contain some good news for those subject to State and Local taxes in the US.  Since 2018, the deduction allowed for such taxes for Federal income tax purposes has been limited to $10,000.  The House bill includes an increase in that cap to $80,000 ($40,000 for married persons filing separately).

Net Investment Income Tax

As expected, the 3.8% “Net Investment Income Tax” originally introduced with the Obamacare provisions is to be expanded should the bill get passed in its current state.  The extension of this tax would see it applied to business income for taxpayers whose income exceeds certain thresholds.

Gift and Estate Tax

There had been much talk of changes to the unified credit for gift and estate taxes, which currently stands at $11.7m per person.  It is notable that there is no provision in the House bill which makes any reduction to this amount.

Summary

With the President himself admitting that these tax reforms are unlikely to be passed anytime soon, and with resistance from key Senators, it would be no surprise to see further changes (and, no doubt, delays) to the bill as it makes its way through the Senate and on to Mr Biden’s desk.  This is therefore something to keep an eye on over the coming weeks, and maybe even months.

Written by Matthew Edwards