If you’d like to read this article later, download the PDF here

We previously published an article regarding the potential changes to the Inheritance Tax Rate and also, Capital Gains Tax UK rate in 2021. This will be announced in the March budget. In preparation for that, this is a practical guide to what actions you can take to minimise the impact of any changes.

Of course, these changes are at present rumours and recommendations, and there is no confirmation about what will happen in March, but it never hurts to be prepared.

So, what are the next steps?

Capital Gains Tax Rate UK 2021

It has been suggested that income tax rates will be raised to as much as 45% and it is likely the CGT will increase to match it. To reduce your Capital Gains Tax bill here are some practical steps.

1. Use your £12,300 allowance which cannot be carried forward to future years. A married couple can therefore raise £24,6000 a year with no CGT liabilities.
2. Use your annual ISA allowance which currently sits at £20,000. All personal CG are tax-free if on ISA investments.
3. Don’t sell assets later in life as this could mean that Capital Gains Tax will be due as well as Inheritance Tax.
4. Consider setting up an all-in-one fund for multi-assets as the fund can sell holdings and therefore won’t be liable for CGT.
5. Ensure any losses are offset against gains which can reduce the amount of CGT owed.
6. Manage taxable income through pension contributions or charitable donations.

Inheritance Tax Rate 2021

The nil-rate band of £325k is likely to change in the March budget as well as changes to rules regarding unused pension pots. However, these practical steps could help you lower the amount of Inheritance Tax your beneficiaries will be liable for.

• You can leave everything to your spouse, or civil partner in your will without there being any Inheritance Tax. You are also able to pass on unused tax allowance to them.
• Give gifts whilst you are alive to loved ones. There are of course some caveats and if you’re not certain, give Everfair a call. But each person can give away £3000 of gifts each year without it being added to your estate. If you don’t use your allowance one year it carries over the next.
• Additionally, you can give £1,000 as marriage or civil partnership gifts which increases for grandchildren, great-grandchildren or your own children.
• You are also able to give random gifts of £250 to individuals as long as you have not gifted them something else in the same tax year.
• Leave part of your estate to charity as this means it will be exempt from Inheritance Tax. If this in turn brings your estate value to less than £325k then that will also be exempt.
• Write pensions and life insurance policies in trust. If this is the case then any pay-outs are not considered as part of your estate. Instead they will be passed to your beneficiaries and won’t be liable for Inheritance Tax.
• Bequeath your house to your children, stepchildren or grandchildren which will include an additional allowance of £175,000.

If you want help in regard to identifying which of these steps will be relevant to you and your situation as well as implementing any of them, please give us a call or email and one of our advisors will be very happy to share some practical, unbiased and professional advice.

If you’d like to read this later, you can download the PDF copy here

As the system currently stands, US citizens, and in many cases people holding a US “green card” have to file an annual income tax return with the IRS. This is regardless of where they are living and working.

This can be a costly and time-consuming exercise. But for those with no plans to move back to the US, the possibility of renouncing US citizenship might help. There a many attractive prospects and benefits to jumping off the US tax law carousel.

However, this is a decision that should not be taken lightly. There are many non-tax issues that should be considered before going ahead.

Although the US Embassy is currently closed due to Covid-19 restrictions, you could use this time to consider whether this would be the best financial and personal option for you.

Renouncing US citizenship cost:

• You must pay the renunciation cost of $2400 USD
• Further financial considerations and clauses are included below

Renouncing US citizenship in the UK — how do I do it?

When abroad, renouncing US citizenship is a relatively straightforward process. It is not necessary to engage an immigration lawyer to ensure that everything is done correctly. Although some people may wish to do so to give themselves some extra comfort.

When renouncing US citizenship, you must follow these steps and requirements:

• Complete the relevant forms prior to the appointment and gather all the relevant documents of proof of citizenship, name changes, divorce and marriage with you.
• Submit the completed forms and copies of the required documents to the US Embassy by email.
• If the Embassy is happy that these are in order, they will schedule an in-person appointment.
• Have a passport proving citizenship of another country. Without a second passport citizenship cannot be renounced.
• Complete a form with your last US tax return which includes a personal balance sheet (i.e. a schedule of all assets and liabilities).
• Pay the renunciation cost of $2400 USD.
• As part of the process if you meet one of three criteria you may also be liable for an Exit Tax:
• If your average income tax liability over the past five years is more than the specified amount (for 2020 this was $171k, and is adjusted annually for inflation).
• If the aggregate net value of your global assets less global liabilities is in excess of $2m.
• If you fail to certify five years of tax compliance to the US.

If you meet any of these criteria you will be treated as if you disposed of all assets on the last day of your US citizenship and will be taxed according to the Capital Gains Tax requirements.

However, there are some exemptions to the Exit Tax tests listed above. Firstly, some people born with dual nationality, and citizens under the age of 18.5 years old are not liable to pay it.

Pros and cons to renouncing us citizenship

With any potentially life-changing decisions there are pros and cons and these need to be considered very carefully.

Pros

• Simplifies tax liabilities.
• No longer necessary to file US tax returns when working abroad resulting in reduced banking costs and implications.
• You only have to report income to the US which comes from sources within the US.
• Any interest earned on assets within a US bank will now be tax-free.

Cons

• There is a cost to renouncing in the form of the administrative cost as well as the Exit Tax.
• As with any other nationality it will be very difficult to get a job in the US.
• Unable to vote in elections.
• You may need a visa to visit the US unless you have citizenship in a country with a Visa Waiver Program.

If you are considering renouncing your US citizenship to simplify your tax affairs, why not give our team at Everfair a call and we can talk you through the process and how it would benefit you and your circumstances.

How will the UK Budget change in March affect me?

It was recently announced that Rishi Sunak will deliver the UK budget on March 3, 2021. This will be greatly anticipated, as it had been postponed from November 2020 in light of the continuing COVID-19 measures and it will also be the first budget with the UK independent of the EU.

With the COVID-19 bill in excess of £300bn there is little doubt that tax reforms will be put in place to claw some of this money back.

With very little information available about what these tax reforms may look like all we can do is speculate and try to prepare for the impact.

Easy wins are likely to be the name of the game, therefore targeting higher earners and those who are able to pay.

What will the UK Budget Change 2021 mean for me, with the capital gains tax uk rate set to change?

There are a number of potential avenues in which you could be affected in the spring budget should all the proposed and rumoured changes be introduced.

Capital Gains Tax UK rate

In November 2020 the Office of Tax Simplifications published their report with a series of recommendations in regard to CGT.

One suggestion was aligning the Capital Gains tax rate with income tax. Currently there are four rates of CGT between 10% and 28%. It is thought that income tax rates will be raised to 45% and it is likely the capital gains tax rate will increase to match it.

UK Tax Change 2021: Wealth Tax

In December 2020 the Wealth Tax Commission presented their report on proposed changes to the current tax laws. The Wealth Tax would be introduced as a one-off payment of 5% (or a rate of between 3% and 8%) on assets over £500k.

They also endorse that this tax should be applied to global assets of anyone resident in the UK on the appropriate date, or an individual who was resident in the UK for four of the previous seven years. The assets could include main homes, businesses, agricultural business, personal items and pensions over £3,000.

In order to prevent avoidance, the report recommends introducing the Wealth Tax without warning or even retroactively.

UK Tax Change 2021: Social Care/Dementia Tax

Unlike other long-term illnesses like cancer, dementia care is funded by the patient or their family. In November 2020 Sunak pledged in his spending review an extra £1bn for the Social Care sector.

This will likely be dependent on a Council Tax raise which is thought to be the highest possible increase of 2% with an extra 3% coming from the adult social care precept.

UK Tax Change 2021: Pension Tax Relief

There are various tax relief options in place at present on pension contributions.

However, it is thought that the Conservative government may remove additional tax relief applied through self-assessment as well as possibly ditching the higher level of tax relief altogether on pension contributions.

At present it is possible to apply tax relief on private pension contributions up to 100% of an individual’s salary, with the annual allowance of tax-free contributions at £40,000. However, this is likely to change with reduced allowances for those with a threshold income of more than £200k or an adjusted income of £240k.

UK Tax Change 2021: Welsh Tax

Welsh income tax rates, however, are thought to likely remain the same as 2019–2020 meaning rates of 10%, 30% and 35% for the highest.

These will be added to the UK income tax rates. However, whilst income tax is not going to change, they are proposing a new tax for people with second homes of 4% on properties up to £180,000 and 16% for those worth £1.6m.

What next? Help from UK Tax Advisors

If you are concerned about how these proposed changes could affect you, please contact the team at Everfair for some no-nonsense advice.

If 2020 hadn’t been challenging enough with the uncertainty surrounding the economy and the global pandemic there was a contested US election to top it off. With Trump’s law cases slowly being thrown out, it seems inevitable that come January 20th there will be a new president in the White House, and a new administration in office.

Although until the day the administration officially changes, and legislation is actually put in place we can only speculate on how this new administration will affect US expats living in the UK.

Possible tax changes on the horizon

However, as part of the Democrat election campaign some of their proposed tax reforms have been considered radical as they pretty much reverse changes made in 2017 by the Trump administration and will primarily affect high earners — at home and abroad.

The key proposed changes for Americans abroad include:

· Income Tax increase — To increase the highest rate of tax from 37% to 39.6%. This would bring the top rate of income tax in line with Obama-era tax rates.

· Capital Gains Tax changes — Long Term Capital Gains and Qualified Dividend tax rates to be scrapped for those with income over $1m. This would mean a change from the existing 20% rate to to bring it in line with ordinary income rates.

· Estate and Gift Tax increase — To increase the top tax rate from 40% to 45%, and to decrease the tax exemption from $11.58m to $3.5m. There is also a proposal to repeal rules that provide for a step-up in basis for inherited assets, which could have a significant impact on taxpayers inheriting appreciated property.

· Corporation Tax increase — The proposal would increase the Corporation Tax rate from 21% to 28%.

· Global Intangible Low Tax Income (GILTI) changes — The legislation currently in place allows a 50% deduction for foreign registered companies that are subsidiaries of US corporations. The proposal is to repeal this allowance and therefore increase the GILTI tax rate from 10.5% to 21%. The deduction did not apply to individuals owning foreign companies, so would only affect those whose business interests are held by US corporations.

· Child Tax Credit and Dependent Care Credit increases — These proposals would increase the Child Tax Credit from $2,000 to $3,000 ($3,600 for children under the age of 6), with the full amount eligible for a refund. In addition, the proposal for Dependent Care Credits would see the maximum claimable amount increased to $8,000 for one child or $16,000 for two or more children.

Such changes, if passed, could have a significant impact on the amount of tax you are due to pay to the US government.

How much difference can Biden actually make?

Ironically, winning the election was the easy part for Joe Biden, as once he takes his place at the White House the hard job of getting legislation through Congress will begin.

Depending on the outcome of the Georgia run-off elections, it is possible that while Democrats will have control of the House, they may still be the minority in the Senate. For any significant changes to be approved, the incoming President may need to secure an element of bipartisan support, so do not be surprised if some of his proposals fall by the wayside or get heavily watered-down.

What next?

With the situation being so uncertain you could be tempted to ‘wait and see’ but it is better to be prepared and start the conversations earlier rather than later. If you think some of these tax changes could affect you, or you would like clarification, give us a call today and we will offer advice on what the best plan of action could be for you at this time.

2020 has been an expensive year for the UK government; seeing a debt so far of nearly £215bn which is expected to rise to £394bn before the end of the financial year. Compared to the £55bn which the government expected to borrow this is substantial to say the least.

At some point this will need to be paid back, and needless to say, the government will be looking for easy ‘quick-wins’ in regard to recouping some of that money in the spring budget.

Of course, at this stage it is all speculation but it is better to be forewarned so you are able to protect yourself and make informed decisions regarding inheritance and gifts to loved ones.

So what changes are likely?

A number of changes in inheritance tax have been suggested by the All-Party Parliamentary Group (APPG).

• End of the freeze on the basic nil-rate band. At present there is no tax to pay on estates worth £325,000 or less regardless of whether this is bequeathed to a spouse, civil partner or charity.
• Abolition of the additional residence nil rate band which currently allows married couples to pass assets of £1 million between them free from IHT in certain circumstances.

These proposals, if enacted, would on their own have a real impact on an individual’s IHT liability as asset values are affected by inflation and the value of the property inevitably increases and therefore so does the IHT due. This is likely to be the case even for many US citizens who are also liable to US estate tax given the current $11.6 million threshold per person there.

It is however also suggested that the rate of IHT is reduced to 10% on estates of up to £2 million and 20% on amounts over that threshold.

The rules regarding lifetime gifts, also known as Potentially Exempt Transfers (PETs) are also under review. At present you are able to give a gift to a loved one free of IHT if you live for another seven years.

Instead in 2021 this is likely to be replaced with a lifetime inheritance tax charge of 10% when a gift is made where the gift exceeds £30,000.

Another relief often used in estate planning is gifts out of surplus income. This allows individuals to pass on amounts from their annual income that they do not need to meet their living costs, free from IHT. This relief has also been identified by the APPG as one which should be removed

Perhaps more controversially, the APPG have recommended the abolition of both Business Property Relief (BPR) and Agricultural Property Relief (APR) which at present are both means of passing on assets without the risk of inheritance tax. On top of recent changes and further proposals regarding CGT reliefs available in connection with business assets, entrepreneurs may feel that 2020 has not been a good year from a tax perspective and question if Britain is “open for business”. US citizen business owners will be more familiar with this situation given no relief is available for US estate tax purposes on such assets.

According to the All-Party Parliamentary Group (APPG) Inheritance Tax and Intergenerational Fairness who made the suggestions, removing the reliefs and introducing the flat rates makes inheritance tax easier to understand. However, these changes are likely to bring in a lot of extra revenue for the government but may not be quite so beneficial for you and your family following your death.

So, what next?

Although none of these changes are certain yet, it doesn’t hurt to actually start the conversation to see what can be done to ensure you pay appropriate tax which is still beneficial to you and your estate. It could be that if you are considering a substantial gift to a loved one, you decide to do this sooner rather than later before the tax changes come in.

Some of these changes, if taken forward by the Government, would result in a very different type of estate planning than has traditionally been the case.

For US citizens this will be equally important, especially whilst the US estate tax exemption remains at its current high level.

To discuss all the available options, give our team at Everfair a call today and we will offer advice on how these changes could affect you if they do come into place in the spring.

If you are a US citizen you will be aware that as we are reaching the end of the financial year (December 31) it’s time to start thinking about your tax return for 2020, even if you live abroad.

Although it’s not normally due until April 15, or June 15 for those taxpayers living outside the US, last year’s filing deadline was extended to July 15 due to the pandemic. To date, no such extension has been announced for the 2020 Federal tax return season. State and local filing deadlines vary from State to State.

However, whether April or June, it’s never too soon to start preparing the information that you will require to ensure that the process runs smoothly. As usual, if you can’t meet the April or June deadlines, there is the option to file for an extension of time.

What do I need to do?

There are various pieces of information and documents that you will need to gather and prepare, if you are a US citizen residing abroad, as well as completing a tax return form. This information will include:

· Travel — A schedule of the countries (including USA) you have visited with dates of arrival and departure.

· Wages, salaries and compensation — All official documentation (e.g. W-2, P60, P45, payslips, etc.) as well as any self-employed records of income and expenses.

· Interest and dividend income — This is either from a foreign bank, domestic bank or other financial institution.

· Any other income — This could include income from partnerships, trusts, or other business interests that you have.

· Interest, taxes, and other deductible expenses paid — As a US citizen, mortgage interest, property taxes, and State income/sales taxes can count as a deductible expense. Other deductible expenses can include charitable contributions, alimony, and medical expenses.

· Foreign housing expenses — You may be eligible to deduct the cost of your accommodation outside the US.

· Dependents — You must provide information including, if available, Social Security Numbers (SSN) or Individual Tax Identification Numbers (ITIN) of your dependents.

· Foreign financial accounts — You will need to provide information regarding your foreign bank and other financial accounts.

· Foreign trusts, companies, and partnerships — If you have an interest in a foreign entity such as a trust, company, or partnership, you may need to provide detailed information about that entity.

The sooner you start to gather the correct information the better, and if you are unsure what applies to you or what can be counted as a deduction contact your tax specialist who will be able to guide you.

Year-End Planning

In addition to preparing for next year’s tax filings, you might wish to consider a few simple year-end planning exercises to make your tax affairs run more smoothly:

· Paying any foreign taxes due before the end of the year — the default US tax rules on claiming credits for foreign taxes paid are to consider taxes actually paid during the calendar year. So, paying before the end of the year will mean the the credit will be available on the current year’s tax return.

· Realising capital losses — if you have realised capital gains for the year, you may also wish to consider realising any potential capital losses to minimise your tax exposure, as losses can be carried forward but not backwards. If this is something that you are keen to explore, you may wish to consult your financial adviser (if you have one) before taking any action.

· Consider whether to make other deductible payments, such as charitable donations and State tax payments during the current year.

· With a new Administration set to take over at The White House in January, there is abundant speculation around tax law changes that might be implemented, including reductions in gift and estate tax exemptions, and increases in income tax and long term capital gains tax rates. Whilst none of this can be predicted with any degree of certainty, you may wish to address how any changes might impact you.

Do the new laws affect you?

New US tax laws were passed in December 2019 extending a number of expiring provisions. Additionally, some new tax changes take effect from 2020 including:

· Changing the age for required minimum distributions from retirement plans from 70.5 years to 72 years.

· Repeal of the maximum age for traditional IRA contributions.

· More generous provisions for deducting charitable donations, including a repeal of the AGI limitation and an ‘above the line’ deduction of up to $300.

If you are uncertain which of these breaks could benefit you or your family when you file your US tax return, here at Everfair we are always available to advise you based on your personal circumstances.

Do I need a tax specialist?

Although as a US citizen living abroad it is not necessary to engage a US tax specialist to help file US tax returns, it will definitely save you time and give you peace of mind, and it could minimise the amount of tax you could ultimately pay by ensuring all the tax breaks, exemptions and deductible expenses are taken into account, as well as reducing your risk of double taxation.

Obviously the more time, stress and tax saved will vary on your personal circumstances and how complex your financial situation is.

For peace of mind, and a stress-free US tax return why not contact us today and ensure your tax return is as accurate and as beneficial for you as possible.

How do the UK tax changes to CGT / IHT affect you?

A recent report from the UK Office of Tax Simplification (OTS) following a review of the Capital Gains Tax (CGT) has outlined some recommended changes to Capital Gains Tax (CGT). The second part of the report is due in 2021.

Changes to UK CGT are likely to be an attractive option to the Chancellor as he looks at ways to reduce the borrowing taken to fund Covid 19 support measures. Here, we’ll share an executive-level breakdown of the changes, followed by a brief overview of how, in our experience, we feel this could impact you.

So, what are the changes to UK Capital Gains Tax?

Well, the report outlines eleven potential changes to the CGT which could raise a substantial amount for the government in increased tax revenue.

The main changes suggested are:

• CGT rates should be more closely aligned with income tax rates. This could see some current CGT rates double
• A new relief should be introduced to take account of inflation
• There should be more flexibility in how capital losses are used
• If capital gains tax rates are not aligned with income tax, changes should be introduced to the taxation of share based rewards for employees and small business owners, to increase the extent to which these are subject to income tax
• The annual exempt amount could be reduced from £12,300 per annum to between £2,000 and £4,000 — a dramatic decrease
• This should however, be combined with a wider exemption for personal effects, taking them out of the charge to CGT
• A CGT uplift should no longer be applied to assets exempt from IHT, and in fact potentially all inherited assets. Instead beneficiaries will pay CGT based on the price that the asset was purchased for originally. If the uplift on death is removed, the recommendation was that there should also be a greater ability for assets to be gifted CGT-free during lifetime, with again the recipient taking on the original purchase price of the asset
• There should also potentially be a flat rebasing of all assets for CGT to their value in the year 2000
• The report also recommended a reassessment of CGT reliefs as the OTS believe the Business Asset Disposal Relief and Investors’ Relief are not working. The suggestion is that the former should be replaced with a different scheme with its basis in retirement and the latter be scrapped.

We’ll now share how exactly these Capital Gains Tax changes will affect you

The long and short of it is that, should these changes in CGT be taken forward by the UK Chancellor, many people could end up paying more in tax to the UK government.

Second-Home Owner and/or soon-to-inherit?

This is likely to be the case if you are set to inherit considerable assets, have an investment portfolio and/or a second home.

An increase in the CGT rate (to align with income tax rates) will no doubt result in a much higher liability being faced by those who choose to sell assets which have increased in value.

Coupled with a reduction in the annual exemption, this could present challenges for those looking to efficiently supplement pension income in retirement with funds from an investment portfolio.

The changes to how the CGT and IHT work together could also end up costing you more in tax pay-outs. Currently if you inherit an asset and sell it, the CGT is based on the difference in value between receiving and selling said asset. However, this will be changed, and it will become the difference between the date it was bought and the time it was sold. If this is no longer the case, there is potentially a double taxation issue to deal with, as both IHT and CGT will now be due in respect of the same asset.

Business Owner or Entrepreneur?

For business owner’s Business Asset Disposal Relief / BADR (otherwise previously known as Entrepreneurs Relief), is to be replaced with a system focused on retirement. This is likely to mean an introduction of an age limit, as well as increasing the holding period from two-to-ten years to ensure only those who have spent years building their businesses will actually benefit from the relief. For many entrepreneurs this will be an unwelcome follow on blow from the reduction in the level of this relief from £10 million to £1 million in April this year.

Our recommended next steps for you

If you are confused about what you need to do regarding these potential changes, or just want some impartial, sensible advice on the best course of action then speak to our professional tax specialists at Everfair today.

Allow us to find the right tax solution for your personal circumstances and set your mind at rest that you are doing the right thing for you, your family and your financial future. https://www.everfairtax.co.uk/contact