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How might the US election affect financial planning for US citizens in the UK?

Trying to predict the outcome of the US presidential election is not as easy as it might seem.  Polls appear to have Joe Biden with a comfortable lead, however, due to the Electoral College system, a few people in a limited number of states may decide the election. Donald Trump won in 2016 when the polls gave Hillary Clinton the lead, so they are not 100% reliable.

That said, pundits argue that Biden’s lead is more likely to result in a win and that may clear a path for the Democrats to enforce a wave of tax reform. Arguably there may be more pressing items for Biden to focus on initially, but tax reform could be enacted late during 2021 but retroactively implemented to start as of 1st January 2021.

We have no crystal ball and cannot say with certainty what will happen. However, the Biden/Harris Campaign have provided a number of indications on tax policy and it is advisable for US citizens in the UK to consider some advance planning with their advisors.

So, what do US citizens in the UK need to think about?

Income tax

President Trump’s tax reforms reduced tax on high earners and Biden is looking to achieve more balance, by raising ordinary income tax rates, with the top rate potentially at 39.6% and potential changes within the lower bands.

UK income tax rates tend to be higher than the US, so for UK tax residents there may be little change on balance. However, it may be worthwhile reviewing your personal position and if higher rate would affect you, consider bringing forward taxable events so that you receive income in 2020 rather than 2021.

Long-term capital gains

It has been reported that Biden is looking at the long-term capital gains tax rate, and a potential increase to bring it in line with income tax seems to be in consideration.  This is similar to proposals in the UK and could mean that tax on capital gains jumps from 20% up to the ordinary income tax rate. In co-ordination with the aforementioned income tax raise, this could be up to 39.6%.

With this being a potential for both the UK and the US, you may wish to consider harvesting unrealised gains during 2020 and/or deferring the realisation of losses where possible so that they can be offset against future gains.

US citizens may also want to consider their position in relation to potential US Capital Gains Tax on their UK home. Unlike in the UK where the primary residence is not subject to capital gains taxation, only the first $250,000 per person is excluded in the US. It may, therefore, be that restructuring ownership now (especially if you have a non-US spouse) may reduce the overall tax due at a later date.

Estate and gift tax

With the US exclusion from estate tax being set at over $11million, many will be forgiven if they have focused mainly on UK inheritance tax planning. However, Biden has indicated support to rising the level of estate tax and to change the taxation of assets on death.

Potential changes could include a reduction of the except amount to $5million and an increase in the rate of tax to 45%.

It would also seem likely that Biden would reintroduce an Obama proposal to impose mark-to-market tax on assets on death or eliminate the current position where beneficiaries get a ‘step-up’ in cost basis on death.

This would create quite a difference between the UK and US treatment and would bring with it other considerations around the transfer of assets to/from non-US spouses and foreign trusts.

These are just some of the areas that might be impacted and nothing is set in stone. We recommend that you discuss your position with your financial planner and/or tax advisor, so that you can consider what actions might be beneficial in your personal circumstances.

Nathan Prior
Partner, Head of PWM International
nprior@partnerswealthmanagement.co.uk
020 7444 4053

 

 

The contents of the article have been prepared solely for information purposes. The article contains information on financial products and services and such information is designed for and addressed solely to individuals seeking generic industry information.