UK Year End Planning – Five potential planning opportunities for US people living in the UK
The 2016/17 UK tax year will come to a close on 5 April 2017. As the year end quickly approaches, we outline five questions that US people living in the UK may want to give planning consideration to:
(1) Have both you and your spouse reviewed whether you have effectively utilised your UK Capital Gains Tax (CGT) Allowance?
For the 2016/17 tax year, the UK CGT allowance is £11,100. This means that for an Arising basis taxpayer the first £11,100 of gains realised per individual is tax free from a UK perspective regardless of income levels. Since each individual is entitled to this allowance, it can often make sense to hold some invested assets in each individual’s name. This is especially true if one spouse is in a lower tax bracket due to differing earnings bands. If assets aren’t already structured across both spouses, it may make sense to give consideration to gifting some assets into the lower income spouse name in order to both utilise available allowances and lower the overall effective rate of tax paid. The implications of this will depend on whether each spouse is a US or non-US person so it is important to first understand how much is allowed to be transferred between spouses on an annual basis and what type of assets are tax-efficient for each individual, etc. When making rebalancing decisions for your investment portfolio, it may make sense to realise some gains that will help use these allowances.
(2) Do you need to apply for UK lifetime allowance protection?
The lifetime allowance for UK pensions is decreased from £1.25 million to £1 million on 6 April 2016. Anyone who has not contributed to their UK pensions in the 2016/17 tax year and doesn’t already have protections in place may want to consider whether Fixed Protection 2016 is appropriate. Alternatively, anyone who had UK pensions that totalled £1 million or above as at 6 April 2016 and who didn’t already have protections in place, but has contributed to their UK pensions in the 2016/17 tax year may want to consider applying for Individual Protection 2016 to limit their exposure to the lifetime allowance charge in the future. It is important to note that applications for protections under IP2014 remain available until April 2017. This would be applicable for someone who had UK pensions that totalled £1.25 million or more on 6 April 2014.
(3) Have you optimised your UK pension contributions?
A tapering annual allowance for UK pensions was introduced in the current 2016/17 tax year for individuals earning in excess of £150,000. This has resulted in lower contribution limits for individuals with higher incomes. For individuals who still have unused carry forward contribution allowances from the prior three tax years, it is worth considering whether lump sum contributions are appropriate. For those individuals with reduced allowances, and those who have used up their carry forward contribution allowances, it is worth ensuring that you are not making contributions in excess of your allowance.
(4) Have you been UK tax resident for 15 out of the last 20 years?
Under changing rules as of 6 April 2017, UK non-domiciles will become deemed domicile for UK income, gains and inheritance tax purposes after being UK tax resident for more than 15 out of the last 20 years. Any long-term non-domiciles who exceed this threshold and have relied on the remittance basis of taxation in any year since 2008, should take care to review any offshore asset structuring and determine whether any of the transitional planning opportunities apply to their situation. For individuals who have either been in the UK for more than 15 years or are coming close to meeting this 15 year test, thought should be given to whether any actions need to be taken before the close of the current tax year.
(5) If you will move from Remittance Basis taxation to Arising Basis (worldwide) taxation in the new tax year, do all offshore funds have UK reporting status?
Prior to being taxed on the arising basis, the UK will not tax earnings on investments held in the US unless remitted into the UK. However, asset choice becomes very important once a US person is taxed on the arising basis. If a person in this situation invests in US funds that do not have UK reporting status, capital gains earned on the funds are taxed in the UK at ordinary income tax rates. This is known as offshore income gain (OIG) rules. Restructuring assets to ensure that you hold funds with UK reporting status before moving onto the arising basis will almost certainly save taxes over time.
No one likes to pay more taxes than they need to.
Reviewing the above ahead of the UK tax year end in context to your individual situation may help you minimise any unnecessary costs or tax charges in the future.
For more wealth planning tips and tidbits from MASECO read our 39 Steps to Smart Living in the UK.
Risk Warnings and Important Information
The above article does not take into account the specific goals or requirements of individual users. You should carefully consider the suitability of any strategies along with your financial situation prior to making any decisions on an appropriate strategy.
MASECO LLP trading as MASECO Private Wealth is authorised and regulated by the Financial Conduct Authority, the Financial Conduct Authority does not regulate tax advice. MASECO Private Wealth is not a tax specialist. We strongly recommend that every client seeks their own tax advice prior to acting on any of the strategies described in this document.