Following the change of president in the US and as we approach the 3rd March, 2021 UK budget and the increasingly strident warnings of tax rises to come in both the US and UK, we thought it might be useful to share a few key areas that might affect US/UK dual taxpayers in the coming twelve months and further afield.
US developments, the calm before the storm or one that’s blown itself out?
Starting with the recent US election and Democratic control (just) of both the houses of Congress, we might anticipate some impending changes to the US Federal tax system with the new administration. However, though, there are some well documented political hurdles to overcome, that means this is unlikely to be until 2022 or even later for any significant changes or even any at all. To some extent, the Democrats could do nothing and wait for many provisions to expire in 2025 without needing to use time or political capital to do so. A&M US has summarised some of the potential areas for adjustment in a number of articles, including one based on Joe Biden’s campaign promises here. Whilst eventual US changes could be far-reaching and increase overall US taxation on some clients, for those also resident in the UK; any US changes have to be seen through the prism of the UK tax system also.
Heavy UK weather to come?
One would assume the Conservative majority in the House of Commons in the UK would allow for the Chancellor to enact a budget as he saw fit, but there are a number of factors that will influence their decisions; firstly the Conservatives stood in 2019 on an (admittedly pre-pandemic) manifesto that offered a guarantee of no increases in income tax, National Insurance or VAT; secondly, wholesale changes in the middle of a pandemic, significant tax increases, might impact any economic recovery and thirdly launching a raft of new tax so soon after Brexit might give the impression that the UK is not open for business.
However, given the vast costs of the COVID pandemic, a roadmap out of the economic consequences may be required politically and fiscally, and it is almost inevitable that UK tax will need to rise to cover the bill. Given the election promises made, CGT and inheritance tax (IHT) is potentially low hanging fruit (Corporation Tax is too but whilst it no doubt affects Private Clients, it is often less within their control). Given the much higher US Estate and Gift tax limits, UK IHT changes are something that could genuinely impact taxpayers significantly even if this current US overall limit is expected to fall considerably itself.
Do changes affect me, and where are there going to be leaked?
A basic example might be an increase in the headline rate of US tax from 37% to 39.6%. For anyone with UK employment income, given the UK top rate of 45%, this is likely to be somewhat of a non-event, especially given that the higher and top rates of UK tax are reached with much lower income. On the converse side, an increase in long term capital gains tax (LTCG) rates in the US for high-income taxpayers to 39.6% (plus 3.8% Net Investment Income Tax) might present a very real cost for wealthy UK resident US citizens, given a top UK Capital Gains Tax (CGT) rate of 20% (28% for some gains). Of course, that may then in itself be affected by any much-rumoured changes in the UK’s CGT rates, the Office of Tax Simplification (OTS) has identified a number of areas of CGT that it believes are ripe for reform which (to no one’s surprise) generally aren’t to the taxpayer’s benefit.
An interesting area is how some of the proposed changes on both sides of the Atlantic mirror each other. No uplift of asset basis on death for heirs/successors is proposed by both Biden’s election materials and the UK OTS report, so any planning around this might benefit from matching treatment. And if the UK launches the ever-popular next wave of attacks on the taxation of carried interest that may reflect Biden’s proposed LTCG tax reform mentioned above.
What does all this mean for our US/UK clients?
Should then clients carefully consider their tax position now; what are their long term residency positions, are there assets at a gain that should be realised (to lock in lower rates), should succession planning gifts be made sooner, is there action to be taken around accelerating carried interest before its tax perks disappear? Or should they wait and see what happens? All these questions need to be thought about in the context of client’s plans, personal situations, risk appetite (both by being proactive or not doing anything) and existing tax planning, mean that it’s probably worth talking to your advisor sooner rather than later and keeping a careful eye on the horizon.
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How can Alvarez and Marsal help?
A&M has hands-on experience in the complex affairs of international taxpayers. We advise and provide compliance services for clients in the US, UK, and worldwide to allow them to navigate and optimise the complexity that comes with multiple tax and regulatory regimes. Please reach out to Daniel Parry or James Arrowsmith if you have any queries.