Everfair Tax

Specialists in UK, US and Expatriate Tax.

Charitable Giving: Tax Benefits and Strategies

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Charitable giving not only allows you to support causes you care about but can also offer significant tax benefits. Whether you are a US or UK taxpayer, understanding the tax advantages and optimal strategies for charitable donations can help you maximise both your contributions and tax efficiency. This article will explore how charitable donations work in both the US and UK, and some strategies to consider.

Tax Benefits of Charitable Giving in the US

The US offers generous tax incentives for charitable donations, but you must understand the rules to fully benefit.

1. Tax Deductions for Donations

In the US, donations to US-qualified charitable organisations are tax-deductible if you itemise your deductions. The key rules to note include:

  • Qualified Organisations: Donations must be made to IRS-approved charitable organisations to be eligible for deductions.
  • Deduction Limits: You can deduct up to 60% of your Adjusted Gross Income (AGI) for cash donations to public charities. Donations of appreciated assets like stocks may have lower deduction limits (usually 30% of AGI). Any donations exceeding these limits can be carried forward to the next tax year.
  • Itemised Deductions: Only taxpayers who itemise their deductions (rather than taking the standard deduction) can benefit from charitable donation deductions. This means that your total deductions (including charitable gifts, mortgage interest, and medical expenses) must exceed the standard deduction amount to make itemising worthwhile. The standard deduction for 2025 stands at $15,000 for single filers and $30,000 for joint filers.

2. Donating Appreciated Assets

One of the most tax-efficient ways to give is by donating appreciated assets, such as stocks or real estate:

  • No Capital Gains Tax: When you donate appreciated assets held for more than one year, you avoid paying capital gains tax on the asset’s increase in value.
  • Fair Market Value Deduction: You can typically deduct the asset’s full fair market value from your income, subject to AGI limits, making this strategy particularly attractive for high-net-worth individuals.

3. Donor-Advised Funds (DAFs)

A Donor-Advised Fund is a charitable giving account that allows you to contribute funds, receive an immediate tax deduction, and decide later which charities will benefit. This provides flexibility for your philanthropic efforts while offering tax benefits upfront.

  • Tax Deduction: You receive a tax deduction for the full amount in the year the donation is made, even though you can spread out the actual donations to charities over time.
  • Appreciated Assets: You can donate appreciated assets to your DAF, maximising the tax benefits while diversifying your portfolio.

Donor-Advised Funds also provide benefits on your UK tax returns in a similar fashion, which also allows dual benefits (to be covered later).

Tax Benefits of Charitable Giving in the UK

In the UK, charitable donations also provide tax benefits, but the mechanisms are different from those in the US.

1. Gift Aid

Gift Aid is a UK government scheme that allows charities to reclaim the basic rate of tax (20%) on your donation, making your gift go further. If you are a UK taxpayer:

  • Increase the Value of Your Donation: If you donate £100 under Gift Aid, the charity can claim an extra £25, making your total contribution £125 at no extra cost to you.
  • Higher and Additional Rate Taxpayers: If you’re a higher-rate taxpayer (paying 40% tax) or an additional-rate taxpayer (paying 45% tax), you can claim the difference between the higher tax rate and the basic rate on your donation. For example, if you donate £100, you can claim back £25 in your self-assessment tax return (for 40% taxpayers).

One thing to note here: you must pay enough tax on your self-assessment for Gift Aid to be beneficial. Where there is not enough tax paid, HMRC will claw back the difference (which will increase how much you will owe).

2. Donating Shares and Assets

Just like in the US, donating appreciated shares or other assets to a UK charity can provide substantial tax savings.

  • No Capital Gains Tax: You won’t pay Capital Gains Tax on assets donated to charity.
  • Income Tax Relief: You can also claim Income Tax relief on the market value of the shares or property donated, reducing your taxable income for the year.

3. Payroll Giving

Payroll Giving allows you to donate to charity directly from your salary before tax is deducted, providing immediate tax relief.

  • Pre-tax Donations: Donations are made from your gross salary, meaning you receive the tax relief immediately. If you are a 40% taxpayer, a £10 donation only costs you £6, and a 45% taxpayer would only pay £5.50 for the same £10 donation.

Cross-Border Charitable Giving

For individuals with tax obligations in both the US and UK, cross-border charitable giving requires careful planning to ensure you can benefit from tax incentives in both countries. The US-UK tax treaty allows you to claim tax relief for donations made to charities in either country, provided certain conditions are met:

  • Dual-Qualified Charities: Some charities are qualified to receive tax-deductible donations in both the US and UK. By donating to these organisations, you may be able to claim tax benefits in both countries.
  • Foreign Tax Credits: If you give to a non-qualifying charity, you may still be able to use foreign tax credits to avoid double taxation, but you’ll need to coordinate between both tax systems to ensure maximum benefits.

Charitable Giving Strategies

  • Bunching Donations: In the US, if your itemised deductions don’t exceed the standard deduction, consider bunching several years’ worth of donations into a single tax year. This allows you to itemise in that year and claim the full deduction while taking the standard deduction in other years.
  • Donor-Advised Funds: As mentioned earlier, Donor-Advised Funds offer flexibility for both US and UK donors. They allow you to make a large, tax-deductible contribution in one year and distribute funds to charities over time. It allows for all donations to be left to dual-qualifying charities, taking the strain from the taxpayers.
  • Legacy Giving: If you’re interested in making a significant impact through charitable bequests, you can leave assets to charity in your will. In the UK, this can reduce the inheritance tax rate from 40% to 36% if at least 10% of your estate is left to charity. In the US, charitable bequests are exempt from estate taxes, providing a powerful tool for estate planning.
  • Corporate Matching Gifts: Many companies in the US and UK offer corporate matching gift programmes, where they match your donations to charity. This effectively doubles the value of your contribution without additional out-of-pocket costs.

Conclusion

Charitable giving offers a meaningful way to support causes you care about while also providing significant tax benefits. Whether you’re in the US or the UK, understanding the tax implications of your donations can help you maximise the financial impact of your generosity. By leveraging strategies like donating appreciated assets, using Donor-Advised Funds, or taking advantage of Gift Aid, you can align your philanthropy with smart tax planning.

For individuals with cross-border financial ties, it’s essential to carefully plan charitable contributions to take full advantage of tax benefits in both countries. With thoughtful planning and the right strategies, you can make your charitable giving more effective while minimising your tax liability. If you need any assistance with this please get in touch.

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.

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.

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

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.

Managing UK and US Pensions

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Understanding having pension schemes in more than one country.

In recent years, it is increasingly common for executives to have pension schemes in more than one country. Whether that has been from working abroad, or the option to become part of a pension scheme in another country. Therefore, the question often arises when we speak to a client; as to what to do with their pensions from a tax perspective.

Contributions

One of the first questions is often; whether you can get tax relief where you are now resident for contributions into a pension scheme in another country?

Under both the double taxation agreement between the UK and US, and under UK domestic rules, pension contributions to a plan in the other country can qualify for tax relief where you are resident. 

For tax relief to apply, you must have been contributing to the plan prior to becoming resident in the other country. In addition, the plan in question must be a qualifying retirement plan. 

Growth

Under the terms set out in the double taxation agreement between the UK and US, the growth in a qualifying plan in the other country, can’t be taxed where you are resident. Therefore, there is no need to report the annual income and gains received within a pension scheme. Nor the unrealised increase in the value of the assets held in the pension on an annual tax return. The treaty specifically lists IRAs and 401ks as qualifying pension schemes for this purpose.

Withdrawals

As a general rule, under the pensions article of the treaty, withdrawals from a qualifying pension scheme are taxed in the country of residence. This is regardless of where the pension scheme itself is based. However, this rule is subject to the savings clause contained earlier in the treaty. This clause effectively allows the countries to still tax the income on their nationals. Although, they have to provide credit for the tax paid in the country of residence.

It also provides that, where the country in which the pension plan is located would consider something as tax exempt, then it should be considered tax exempt where the person is resident. This would cover situations like the 25% tax free lump sum provided for under UK schemes. As well as the fact that withdrawals from Roth IRAs are tax free in the US. 

This provision is not subject to the savings clause in the treaty mentioned above. It has been the subject of much debate over the years. For example, whether the IRS would allow the 25% lump sum exemption on a distribution from a UK scheme to a US citizen if they are resident outside the US, due to unclear wording of the provision in question. 

Lump Sums

Where a person wants to withdraw their pension as a lump sum, in line with with the double taxation agreement, the pensions article states this is to be taxed where the plan is located. However, it is subject to the savings clause. This allows the country where the person is resident to also tax. This comes with a credit for the tax paid in the country where the plan is located. 

There has been discussion over the years between advisors about the definition of ‘lump sum’ for this purpose. This has included; whether it covers anything but a withdrawal of the whole pot. As well as whether it can still be a lump sum if you have previously drawn on the pension.

Other Charges

As well as the position on distributions, there are additional charges which can arise in respect of a pension. 

In the UK, this includes the lifetime allowance charge. This can apply at certain points when a person has more than their approved lifetime pension fund balance. The fund can vary between just over £1 million and £1.8 million depending on appropriate fixed and individual protections elections which have been made over the years. In the US, there is the 10% early withdrawal penalty if funds are withdrawn from a US pension prior to 59.5%, except in limited qualifying purposes.

The treaty doesn’t specifically provide for what happens with respect to these charges when the person receiving the funds is in the other country. Therefore, that country would normally have a right to tax regular distributions. There is very limited guidance or comment from both the IRS and HMRC. This means that such charges, where applicable, may be in addition to the normal income tax charge arising between the two countries.

Inheritance Tax (IHT) and Estate Tax

From a UK IHT perspective, UK schemes can generally be outside the scope of IHT. However, there is a potential issue with US pension schemes. These may qualify for the same treatment as domestic schemes, if they meet the conditions to be Qualifying Non-UK Pension Scheme (QNUPS) under the relevant regulations. Yet, there is an important difference in the way they are structured when compared to UK schemes.

With UK schemes, there is a non binding letter of wishes. This letter allows the trustees discretion over who they pay the funds to when a pension account holder dies. Although, they are likely to follow the letter of wishes. With the majority of US schemes, there is a binding nomination made as to who will receive the funds. This means the trustees have no discretion at all as to whom they pay the monies to on the account holders death.

This is a crucial difference as it means under UK tax rules, even if the scheme qualifies as a QNUPS, the value of the pension scheme is considered to fall back into the pension account holder’s estate for UK IHT purposes.

If you would like any help with your pension management. Or have any further questions on this topic, please don’t hesitate to contact us.

Client Work | Roald Dahl Story Company & Netflix Acquisition Deal, 2021

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You might have heard… Netflix recently acquired the iconic Roald Dahl Story Company (RDSC). This is incredibly exciting news. As part of the tax advisory team for RDSC and the wider Dahl family, the team at Everfair Tax were honoured to help bring about this remarkable partnership deal which will help bring some of the world’s most loved stories to current and future fans in creative new ways.

With family members resident in both the US and the UK – and the wish to devote a significant part of the proceeds of the sale to fund a charitable trust focused on the areas of children’s health, anti-hate and anti-racism – this was a very interesting and exciting project to be a part of.

It was great to be able to help guide on the tax consequences and ensure that everything was dealt with in the most tax efficient manner. We took into account the tax rules of both countries, the individual needs and wishes of different parts and different generations of the family and aiming to maximise the amount available for charitable work.

We look forward to continuing to work with the Dahl family and seeing these fantastic stories take on new life with Netflix.

How do double taxation agreements work?

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A double taxation agreement is designed to do exactly what it says – prevent double taxation.

It is a treaty between two countries which sets out who gets the main right to charge tax on particular types of income and capital gains.

The other country to the treaty can still potentially charge tax on that income and gains but it would have to allow a credit from the tax that would usually be due for the tax already paid in the other country. Generally this means that you end up paying whichever is the higher of the tax due in the two countries.

Sometimes the agreement does specify that a particular type of income or gains is only taxable in one of the two countries, an example being pension income or a lump sum from a pension scheme in that country. However even then there is usually a part of the agreement that says when the income or gains is not subject to tax in the country with the main taxing rights for example through a claim to the remittance basis, then the other country can still charge tax as there is no double taxation.

US treaties also contain an extra specific carve out known as the savings clause allowing US citizens to be taxed as if the treaty did not exist in most cases. What this means that even if the treaty says the income is only taxable in the UK on a UK resident, it is also taxable in the US but the US would have to give credit for the UK tax due on the same amount. In that way double taxation is still avoided.

In the more unusual circumstances where an individual is considered resident for tax purposes in both countries then before the treaty can even be considered you will need to determine where the person is resident for this purpose. This is done using a four part test set out in the agreement and you go through the four tests in order, stopping when one of the tests is met. The tests include where you have a home, where you main social, family professional and economic ties are (known as the centre of vital interests), where you physically spend more of your time and which country you are a national of.

Double taxation agreements are very useful to avoid being taxed twice on the same income in two places but can be difficult to understand and need to be applied correctly to get the right outcome.

The UK in particular are looking more and more closely and claims to foreign tax credits to ensure they are allowable under the terms of the various double tax agreements they have entered into.

Takeover Confirmed: Revisiting the Biden Tax Policy Proposal 2021

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Here, we’re revisiting the Biden Tax Proposal, now that his administration takeover has been confirmed. How will it impact Capital Gains Tax, as well as Estate and Gift Tax.

If you’d like to read this later, you can download the PDF copy here:

Now that the US has a new president, there will inevitably be a lot of change for US citizens, both in the US and those living and working abroad.

With an evenly split senate, it may be easier for Biden to pass some of his proposed legislation that would have been impossible if there was a republican majority. Even a small majority in a vote can make life easier for him.

When reviewing the Biden taxes & policy change, two of the most pertinent changes could be those planned for Capital Gains Tax and Estate Planning.

Biden Tax Policy: Capital Gains Tax changes

Capital Gains Tax will change from a flat 20% to being taxed in line with income rates which are proposed to increase from 37% to 39.6% for the highest band (more than $400K).

It is unclear whether this increase in Capital Gains Tax includes the additional 3.8% tax applied to net investment income. If this is the case CGT could be as high as 43.4%.

However, there are some practical things you can do to reduce your Capital Gains Tax liabilities.

  • Long-term investments: If you hold stock for a long time you will pay less CGT so selling early may not be as beneficial as it seems.

This can also mean anything bought more than a year ago can be considered long-term so ensure you check the trade date of the purchase to sell at the most beneficial time.

  • Tax-deferred retirement plans – Investing in a retirement plan means you won’t have to pay immediate taxes. It is also possible to use this plan for investments which won’t be subject to CGT.
  • Offset gains with capital losses – Essentially if you sold two stocks – one at a loss and one at a gain – the loss of one can be offset against the gains of another therefore reducing the CGT owed.

Biden Tax Policy: Estate and Gift Tax increase

The Estate and Gift Tax rate will possibly increase from 40%-45% and the tax exemption rate will decrease from $11.58m to $3.5m and $1m for lifetime gift tax exemption.

Essentially this restores the levels back to those of 2009. There are, however, some ways of taking advantage of the allowances to reduce the tax owed.

  • Double-up – Married couples (or civil partnerships) have the same allowance each but by combining they are able to gift up to $30k of property tax free, per year.
  • Gifts to spouse – If your spouse is a US citizen all gifts are tax free, but if they are not a US citizen the limit of tax-free gifts is $157k.
  • Timing is everything – The gift allowance runs on the calendar year, and you are unable to carry over allowance from one year to another. However, you are able to spread a large gift over multiple years to reduce the gift tax due.
  • Gifts to children – Gifts can be left in trust to your children, but they must own it outright before they are 21 years old. If they are under 18 there has to be an adult to manage the property for them.

We’ve revisited Biden Taxes – so what next?

With the situation being so uncertain, it is likely you will be watching the development over the next few weeks with bated breath. Instead you could start the conversations and find out what your options are and how such changes could affect you.

If you think some of these tax changes could affect you, or you would like clarification, give us a call today and we will offer advice on what the best plan of action could be for you at this time.