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Essential US tax year end planning reminders from the UK

As we approach the end of the year, the US tax year end also edges closer. For Americans and US taxpayers living in the UK, this creates a mismatch with the UK tax year end on 5th April, and the US tax year end slightly earlier on 31st December. Here are some reminders of areas to discuss with your adviser before the end of the US tax year.

Consider paying UK tax before 31st December

The tax treaty between the US and the UK helps to avoid being taxed twice on the same funds. However, the discrepancy in the two systems between tax rates and taxable periods means that individuals can benefit from some advance financial planning.

Despite the UK tax deadline being 31st January 2022, if you wish to use the UK payment as a credit against your US 2021 taxes, you should make the payment before 31st December 2021.

Alternatively, if you already have excess credits built up which might otherwise expire (they only last 10 years), you may wish to defer your UK tax payment until after year end.

You should speak with your tax adviser to review your foreign tax credit position and align your UK tax payments accordingly to optimise your personal position.

Consider if you can defer or accelerate income or gains to optimise allowance usage and rate bands

Avoiding significant abrupt fluctuations in your income and gains can help optimise use of tax-free allowances and/or reduce the amount that is taxed at a higher tax rate. Therefore, where possible, you may wish to bring forward or defer the realisation of income or gains and move it into the most efficient tax year.

If you have realised significant gains but have unrealised losses, you may wish to trigger realising the losses in order to reduce the overall taxable gain this year.

With proposed tax increases being discussed, individuals with large unrealised gains or flexible income payments may consider accelerating receipt into 2021.

Discussing your personal circumstances with both your tax adviser and investment adviser will help produce a balanced strategy that is right for you.

Consider making gifts either to use the $15,000 annual allowance or to utilise the current lifetime exclusion

For the 2021 American tax year end there is a generous estate tax exemption of $11.7m. Understandably, you may not have been overly focused on estate planning for some time due to his generous exemption. However, uncertainty is mounting on how long this exception will remain at this level before being substantially reduced. Additionally, this exemption is out of line with the £325,000 threshold for those individuals also subject to UK inheritance tax.

Again, the US and UK systems work differently with their own considerations. For example, the annual gift exemption in the USA is $15,000 compared to just £3,000 in the UK. Excess gifts in the UK might be exempt if the donor survives seven years, but in the USA the excess gift is calculated as part of the lifetime exclusion.

There are additional considerations for individuals that are UK resident but not domiciled in the UK. including the use of excluded property trusts.

Long-term financial planning and estate planning can significantly improve the post-tax legacy left to an individual’s beneficiaries. Planning early and making steady progress each year is often the most efficient way to proceed.

These are just some of the areas to think about and discuss with your advisers. Partners Wealth Management has extensive expertise in working with US taxpayer’s resident in the UK. We would be pleased to assist you with your financial planning and investments, and work alongside your chosen tax advisers to optimise your individual planning.


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.