Useful tax year end planning reminders for Americans in 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; the UK tax year ends on 5 April, and the US tax year ends slightly earlier on 31 December.

Here are our thoughts and some reminders of areas to discuss with your adviser before the end of the US tax year:

Consider if you can defer or accelerate income or gains/losses to optimise your tax position

It is generally good planning to avoiding significant abrupt fluctuations in your income and gains so that you don’t spike up into higher tax rate bands. Therefore, where possible, individuals would benefit from smoothing out taxable events across the years and so at the end of each period considering whether to bring forward or defer the realisation of income or gains and move it into the most efficient tax year.

This year’s market setback might also offer opportunity to rebalance or exit certain assets with a lower capital gain. Additionally, if you have already realised gains but have unrealised losses, you may wish to trigger realising the losses now to reduce the overall taxable gain this year.

Keep in mind however the change in FX rates with the UK. Selling an asset that looks like a small gain or even a loss in USD terms, might in fact be a gain in GBP terms and so trigger UK tax later.

Consider paying UK tax before 31 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 31 January 2023, if you wish to use the UK payment as a credit against your US 2022 taxes, you should make the payment before 31 December 2022.

Alternatively, if you already have excess foreign tax 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 consider how best to align your UK tax payments accordingly to optimise your personal position.

Consider making gifts – either to make use of annual gift allowances or to utilise the current lifetime exclusion

For the 2022 year, the US estate tax exemption increased from $11,700,000 to $12,060,000. Understandably, you may not have been overly focused on estate planning for some time due to this generous exemption. However, uncertainty is mounting on how long this exception will remain at this level before being substantially reduced. Under current law, it will automatically reduce after January 2026 by about half.

Additionally, for those that need to consider UK Inheritance Tax, this exemption is out of line with the £325,000 threshold for those individuals also subject to UK Inheritance Tax. You may therefore need to start considering your estate planning and gifting earlier than you think.

Remember, the US and UK systems work differently with their own considerations. For example, the annual gift exemption in the USA is $16,000 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.

Again, lower asset values this year may be an opportunity to gift assets at a lower value and so use less of your overall allowances.

There are additional considerations and options for individuals that are UK resident but not domiciled in the UK (such as the use of excluded property trusts) and those with spouses that do not have the same domicile (such as a limited $164k exemption for transfers to non-US spouse).

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.

Consider if you can defer or accelerate income or gains/losses to optimise your tax position

Consider paying UK tax before 31 December

Consider making gifts – either to make use of annual gift allowances or to utilise the current lifetime exclusion

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