Last Minute Year End Tax Savings – The Top Three Pitfalls for the American
These days there are handy hints all over the place telling us all how to save UK tax before the new UK tax year starts on 6 April 2012. Many of these ideas will also work really well for US citizens in the UK. Others have specific US tax pitfalls. We highlight below the Top Three Problems that we see most often. While these examples are related to UK tax efficient ideas and investments, related US tax issues may still apply to anyone investing in non US investments and advice should be taken.
1. Making gifts to your spouse?
Under UK rules spouses and civil partners are taxed separately. It is standard planning here in the UK to suggest gifting assets generating income or capital gains to a spouse, so that these are in the name of the spouse with the lower UK tax rate.
Care is required if one spouse is a US citizen and the other is not, because there may be US gift tax payable on the gift. Even if there is no gift tax due, additional US tax returns reporting non-US gifts may still need to be filed, with annoying penalties if these information returns are overlooked.
2. Topping up the Pension
The final date for paying pension contributions for the tax year is 5 April 2012. This is also the final date for paying contributions that use up unused “carry forward” pension relief for the 2008/09 tax year.
Many UK pension plans may be treated as foreign grantor trusts for US tax purposes, potentially requiring additional annual US form filling forever after. The nuisance or costs of additional US form preparation should be balanced against UK tax savings. If the contributions are paid by a US person, advice should be taken on US tax consequences before investing.
3. Investing in ISAs, VCTs or EIS?
All of these are popular tax effective investments in the UK (Individual Savings Accounts, Venture Capital Trusts and the Enterprise Investment Scheme). These can reduce current or future UK tax and – in the right circumstances – reduce unused “excess foreign tax credits” for Americans in the UK.
None of these are by themselves “bad things” for a US investor. However, many UK investments are treated as Passive Foreign Investment Companies (PFICs) for US tax purposes. A PFIC can result in annual US reporting and possibly high rates of US tax. Investments that are not PFICs include quoted direct shareholdings and cash. Collective investments such as UK unit trusts and VCTs are always PFICs, although some can be structured with the right advice to reduce any US tax problems. Any additional US tax burden should be weighed against UK tax advantages. Ideally US advice should be taken before investing.
Do it now?
5 April 2012 is fast approaching. Best of luck with last minute planning! Just ask us if we can help. Honestly, truly, we have many practical and often simple solutions to most US tax problems that come our way. Delighted as ever to help at this crucial time of year.