UK Year-End Tax Planning/US Pitfalls
With all the temporary business closures happening as a result of COVID-19, it might be easy to forget that life still goes on. The US may have extended their deadline, but the UK tax year will still end on the 5th of April regardless of the present circumstances. Therefore, as we approach the UK year-end, we have put together some things to consider whilst you are at home.
We tell clients that, generally, things that are not taxable in the UK are often taxable in the US. Dual citizens need to find a balance. Below are some considerations for UK year-end tax planning and the potential pitfalls from a US point of view.
Individual Savings Accounts, Enterprise Investment Schemes and Venture Capital Trusts are all tax-effective ways to invest from a UK tax perspective. These can reduce current or future UK tax and, in the right circumstances, reduce unused “excess foreign tax credits” for Americans in the UK.
Whilst these aren’t bad investments they may be treated as PFICs (Passive Foreign Income Companies) from a US perspective, which will almost certainly result in a US reporting obligation, possibly at a high rate of tax as well. Collective investments such as UK unit trusts and VCTs are always PFICs, but with the right structuring, liability can be minimized. Quoted direct shareholdings and cash would not be considered PFICs. Weigh the advantages and disadvantages and take US tax advice before investing.
Additional Contributions to a Pension Above the Annual Allowance Maximum
The final date for paying pension contributions for the 2019/20 tax year is 5 April. You are currently allowed to make contributions up to the annual allowance threshold of £40,000 to a qualifying pension in a given year under HMRC rules. (The maximum contribution amount is reduced for incomes over £150,000 to a minimum of £10,000.)
If you wish to make contributions above this amount, HMRC rules allow you are also able to utilise any unused allowances from the prior 3 tax years if available. As such, if you have any unused allowance relating to the 2016/17 tax year, you should consider whether you wish to make an additional pension contribution by April 5 or lose the benefit forever.
Please note that some pension plans will require additional US tax forms to be filed. Be prepared to weigh the cost of this preparation against UK tax savings. Advice should be taken if the contributions are being made by a US person. See our post on What is a US Person for Tax Purposes for further clarification.
Gifting to a Spouse
Spouses and civil partners are taxed separately in the UK. Typically, assets that generate income or capital gains are gifted to the spouse with the lower UK tax rate.
However, if there one spouse is a US citizen, there may be US gift tax obligations. This may not result in having to pay tax but may require US reporting (more forms!) imposing a penalty if these information returns are not filed, even if it was accidental or overlooked.
As 5 April 2020 is fast approaching, if we can help balance your UK/US tax planning, please get in touch. There is often a solution to most of the US tax bumps in the road.