As we approach the end of 2023, it’s essential to keep the US tax year end in mind, even while living in the UK. The timing is unusual, with the UK tax year concluding on 5 April and the US tax year ending on 31 December.
Here, we offer some considerations and reminders to discuss with your financial adviser before the end of the US tax year.
1. Review opportunities to adjust income and gains/losses
Effective tax planning involves avoiding sudden spikes in income and gains that could push you into a higher tax bracket. To achieve this, consider smoothing out taxable events across the years and at the end of each period consider whether to bring forward or defer the realisation of income or gains and move it into the most tax efficient year.
With market uncertainty, it might be an opportune time to rebalance or exit certain assets, potentially reducing capital gains. Additionally, if you’ve already realised gains but hold unrealized losses, you might consider realising those losses now to offset taxable gains in the same year.
However, be mindful of currency exchange rates when assessing the impact on UK taxes.
2. Consider paying UK tax before 31 December
The US-UK tax treaty is designed to prevent double taxation but the timing misalignment between tax rates and taxable periods offers financial planning opportunities.
Despite the UK tax deadline being 31 January 2024, if you wish to use the UK payment as a credit against your US 2023 taxes, you should make the payment before 31 December 2023.
On the other hand, if you have accumulated excess foreign tax credits that might expire (they are valid for ten years), you could opt to delay your UK tax payment until after the year-end.
You should speak with your tax adviser to review your foreign tax credit position and consider aligning your UK tax payments for optimal results.
3. Explore gifting strategies
For the 2023 year the US estate tax exemption increased from $12.06m to $12.92m. Understandably, you may not have been overly focused on estate planning for some time due to this generous exemption. However, it’s uncertain how long this will last before it significantly decreases. Under current law, it will automatically reduce after January 2026 by about half.
Additionally, for those that also need to consider UK Inheritance Tax, this exemption is out of line with the £325,000 threshold. You may therefore need to start considering your estate planning and gifting earlier than you think.
Be aware that the US and UK have different gifting rules, such as the annual gift exemption of $17,000 in the USA compared to £3,000 in the UK. Different rules apply to excess gifts, too. Consider leveraging lower asset values this year for gifting to maximize your allowances.
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 $175k exemption for transfers to a 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.
We’re here to help
These are just some of the areas to think about and discuss with your adviser. 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
Partners Wealth Management does not provide tax, legal or accounting advice. It is important to take professional advice before making any decision relating to your personal finances. Information within this document is based on our current understanding and can be subject to change without notice and the accuracy and completeness of the information cannot be guaranteed. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK. We cannot assume legal liability for any errors or omissions it might contain. Levels and bases of, and reliefs from, taxation are those currently applying or proposed and are subject to change; their value depends on the individual circumstances of the investor. No part of this document may be reproduced in any manner without prior permission. Taxation is based on your individual circumstances and may be subject to change.
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