Proposed US Income and Estate Tax Changes
Changes to Income and Estate Tax have been discussed among Congress and the Biden Administration during 2021. On Monday, the US House Ways and Means Committee published proposed legislation which will be debated over the coming weeks. There may be some alterations to the proposals as negotiations take place within Congress, but the legislation provides a bit more clarity on the direction of travel and the intended effective dates should the legislation pass.
Below we provide a high-level summary of the key proposed changes:
- A reduction of the estate tax allowance from the current $11.7 million to $5.0 million (indexed for inflation). The new threshold would become effective as of 1 January 2022 leaving the remaining part of the 2021 calendar year for individuals able to give away assets in excess of the reduced threshold to consider doing so. There will be no clawback for use of the increased exclusion amount ahead of the reduction.
- The proposed legislation does not mention the elimination of the cost basis uplift on assets transferred at death or any change to the 40% rate of estate. It also excludes any change to the annual gifting allowances.
- Top individual income tax rates will revert to 39.6% from the current 37% for taxable income above $400,000 for individuals and $450,000 for married couples.
- Introduction of a new 3% surcharge on individual taxable income above $5 million and on trust taxable income above $100,000.
- An increase of the long-term capital gains tax rate to 25% (from the current 20%) for individuals with a taxable income above $400,000. This new rate would become effective on transactions taking place after the date the legislation was proposed (i.e. 13th September 2021).
- Carried Interest would need to be held for 5 years as opposed to 3 years to qualify for capital gains tax rates.
- An increase in the top corporate tax rate to 26.5% from the current 21% and a return to a graduated rate system ranging from 18% to 26.5%, depending on level of company earnings.
- Those clients considering settling Trusts as part of their gifting strategy should potentially accelerate the process. The proposed changes to Grantor Trust rules would take effect the date legislation is passed, which could be a matter of weeks.
- Trusts that have been funded prior to any change in legislation should not be affected.
- The legislation would also eliminate the ability to use discounts to fund common US trust structures, such as Irrevocable Life Insurance Trusts (ILITs), Grantor Retained Annuity Trusts (GRATs), Qualified Personal Residence Trusts (QPRTs), and Charitable Lead Annuity Trusts (CLATs) unless the asset being gifted or sold is part of an ‘active trade or business.’
Please click here for further information.
While some of the proposed changes could be considered better than expected, some seem to be more wide reaching than expected. For anyone that has been considering gifting strategies they may like to do so with a bit more urgency.
If you would like to discuss how any of the proposed changes may impact you and determine whether any action might be suitable based on your individual circumstances, also considering any relevant UK IHT planning, you should contact your Wealth Manager.
All of the material published on MASECO LLP’s website or via social media is protected by copyright law. You may view the material for your own personal use and you may share the material where it is indicated that this is permitted to other parties for their personal use only. None of the material nor contents may be used for commercial purposes. You may only share articles in the form in which they appear on our website. You are not permitted to take an extract from an article and distribute the extract, for example, by cutting and pasting content into an email.
Use of information:
• Nothing in this document constitutes investment, tax or any other type of advice and should not be construed as such.
• The investments and strategy noted in this document may not be suitable for all investors and making available the information in this document is not a representation by MASECO that any investment strategy is suitable for any particular client.
• This document is provided for information purposes only and is not intended to be relied upon as a forecast, research or investment advice.
• All investments involve risk and may lose value. The value of your investment can go down depending upon market conditions and you may not get back the original amount invested.
• Your capital is always at risk.
• Although the information is based on data which MASECO considers reliable, MASECO gives no assurance or guarantee that the information is accurate, current or complete and it should not be relied upon as such.
• The levels and bases of, and reliefs from, taxation is subject to change. The tax treatment depends on the individual circumstances of each client and may be subject to change in the future.
• Past performance is not a reliable indicator of future results.
MASECO LLP (trading as MASECO Private Wealth and MASECO Institutional) is a limited liability partnership registered in England and Wales (Companies House No. OC337650) and has its registered office at Burleigh House, 357 Strand, London WC2R 0HS. The partners are Mr J E Matthews and Mr J R D Sellon; Mr D R B Dorman, Mr H Q A Findlater, Mr T Flonaes, Mr N B Tissot, Ms A L Solana. Telephone calls may be recorded for your protection.
MASECO LLP is authorised and regulated by the Financial Conduct Authority for the conduct of investment business in the UK and is registered with the US Securities and Exchange Commission as a Registered Investment Advisor.