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.
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.