The recent introduction of Senator Bernie Sanders’s proposed tax reform bill, the “For the 99.5% Act,” has proven to bring the possibility of unprecedented changes to tax and estate planning.

Examples of these changes include:

• – Reducing existing federal estate and gift tax exemptions
• Increasing estate tax rates
• Limiting lifetime transfer strategies
• Imposing new rules and regulations on certain types of commonly used trusts.

Due to the uncertainty of outcome of this proposed legislation, taxpayers may be pre-empted to make changes to their estate planning.

Federal estate and gift tax exemption

At present, federal estate and gift tax exemption is set at $11.7 million per individual and $23.4 million per married couple.

• This exemption may be applied by individuals to gifts made during the taxpayer’s lifetime or to transfers made at the taxpayer’s death.
• The exemption may also be applied partially to lifetime transfers and the remainder to transfers at death.

If implemented, the “For the 99.5% Act” proposes the following changes:

• The federal gift tax exemption amount would be reduced to $1 million per individual.
• The federal estate tax exemption would be reduced to $3.5 million per individual and $7 million for married couples.
• There would be an increase in the progressive estate tax rates for estates exceeding $3.5 million:

• Annual gifting that is tax exempt would be limited to certain transfers, including transfers to trusts and to certain family entities.
• Valuation discounts on the transfer of certain assets.
• The effectiveness of grantor trusts would be limited.
• Grantor Retained Annuity Trusts (GRATs), a longstanding vehicle for highly favourable lifetime transfers, would also face new restrictions.

If the “For the 99.5% Act,” is enacted it would not apply to trusts and transfers created prior to enactment. It may therefore be wise for high-net-worth individuals to consider proactive next steps to address these potential limitations before they become law.

President Joe Biden’s administration unveiled its proposed budget for fiscal year 2022 recently. Treasury says the $6 trillion proposed budget focuses on infrastructure, clean energy, and research and development, and among its many provisions are a host of proposed tax changes affecting individuals and corporations.

One set of tax and revenue proposals, named the American Families Plan, would increase taxes on high-income individuals, make permanent various recent tax credit expansions, further limit like-kind exchanges, and address various tax administration issues, including regulation of paid tax return preparers.

Other proposals are grouped under the name American Jobs Plan, and they include a variety of corporate tax changes, including raising the corporate tax rate and imposing a minimum tax on corporations, tax incentives to support housing and infrastructure, and clean energy incentives.

American Families Plan

The proposed budget would make three changes to the taxation of high-income individuals:

• Increasing the top marginal income tax rate for high earners from 37% to 39.6% for taxpayers with taxable income over $509,300 for married taxpayers filing jointly and over $452,700 for single filers;
• Taxing capital gains of high-income individuals (with adjusted gross income over $1 million) at a 37% rate;
• Imposing capital gain tax on property transferred by gift and on property owned at death;
• Rationalizing the net investment income and Self-Employment Contributions Act (SECA) taxes so that all passthrough business income of high-income individuals is subject to either the net investment income tax or SECA tax.
• Taxing carried interests as ordinary income for partners with taxable income over $400,000;
• Limiting the deferral of gain from like-kind exchanges to $500,000 per taxpayer ($1 million for married taxpayers filing jointly) per year;

American Jobs Plan

The proposed budget calls for the following corporate tax changes:

• Raising the corporate income tax rate to 28% from its current 21%;
• Revising the global minimum tax regime, disallowing deductions attributable to exempt income, and limiting inversions;
• Repealing the global intangible low-taxed income (GILTI) exemption for foreign oil and gas extraction income;
• Imposing a 15% minimum tax on book earnings of large corporations;
• Providing a 10% tax credit as an incentive for locating jobs and business activity in the United States and removing tax deductions for expenses incurred in connection with moving jobs overseas.

How much of this will be passed remains to be seen.

If employed workers were told to work at home by their employer because of coronavirus and, as a result, their household costs have increased, they are eligible to claim the working from home tax relief. It is quick and easy to claim via HMRC’s online portal. From 6 April 2020, the amount employers have been able to pay tax-free without employees having to provide evidence of an increased bill is up to £6 a week. Employees who have not received the working from home expenses payment direct from their employer can apply to receive the tax relief from HMRC.

Eligible taxpayers can claim tax relief based on the rate at which they pay tax. For example, if an employed worker pays the 20% basic rate of tax and claims tax relief on £6 a week, they would receive £1.20 a week in tax relief (20% of £6 a week) towards the cost of their household bills. Higher rate taxpayers would receive £2.40 a week (40% of £6 a week). Over the course of the year, this could mean taxpayers can reduce the tax they pay by £62.40 or £124.80 respectively.

To claim for tax relief for working from home, employees can apply directly via GOV.UK for free. Once their application has been approved, the online portal will adjust their tax code for the 2021 to 2022 tax year. They will receive the tax relief directly through their salary until March 2022. If employees were required to work from home last year but did not claim for the tax relief, they have not missed out; HMRC will accept backdated claims for up to 4 years. They will receive a lump sum payment for any successful backdated claims.

The OECD has said 131 countries and jurisdictions have put their name to an international agreement on an overhaul to tax rules for the digitalized economy and for large multinational businesses.

A handful of territories from the 139-member Inclusive Framework have not yet joined the Statement, the OECD acknowledged.

The OECD said its two-pillar plan seeks to ensure that large multinational enterprises (MNEs) pay tax where they operate and earn profits.

It said: “Pillar One will ensure a fairer distribution of profits and taxing rights among countries with respect to the largest MNEs, including digital companies. It would re-allocate some taxing rights over MNEs from their home countries to the markets where they have business activities and earn profits, regardless of whether firms have a physical presence there.” Meanwhile, “Pillar Two seeks to put a floor on competition over corporate income tax, through the introduction of a global minimum corporate tax rate that countries can use to protect their tax bases.”

The OECD has said that pillar one will newly entitle market jurisdictions to taxing rights on more than USD100bn of profits earned by digital multinationals. Meanwhile, it said the countries had agreed to establish a minimum rate of at least 15 percent on multinational companies. This minimum corporate tax burden will generate about USD150bn annually,

OECD Secretary-General Mathias Cormann said: “After years of intense work and negotiations, this historic package will ensure that large multinational companies pay their fair share of tax everywhere. This package does not eliminate tax competition, as it should not, but it does set multilaterally agreed limitations on it. It also accommodates the various interests across the negotiating table, including those of small economies and developing jurisdictions. It is in everyone’s interest that we reach a final agreement among all Inclusive Framework Members as scheduled later this year.”

Where foreign income or gains are “used” in respect of a loan which is brought to the UK (known as a “relevant debt”), the foreign income or gains are themselves remitted to the UK and a tax charge will arise.

Since 2014, HMRC has taken the position that this is the case when foreign income or gains are used as security for a relevant debt. Crucially, the collateral does not need to actually be called in to satisfy the terms of the loan; if it is “used” to “agree the terms of the loan” HMRC will consider this sufficient, and a remittance will occur.

There are three principal changes:

1. Foreign income and gains not offered as formal security can potentially be remitted

HMRC’s view is that if the loan or the repayment terms are “conditional” on the availability of the foreign income or gains, they consider the foreign income or gains have been “used” in respect of the debt and there will be a taxable remittance.

This gives rise to the potentially worrying scenario where a client may have taken a loan from a bank without offering any formal security over foreign income and gains, however HMRC will argue that there has been an effective remittance.

2. Additional amount remitted when the collateral itself generates income and gains

HMRC also seems to take the position that future income and gains accruing on the assets held as security (for example, if the collateral is a cash account and interest is received, or if the collateral is an investment portfolio and it generates profits) will also be treated as remitted as they arise if they are held in the account over which the bank has security.

3. No cap on the amount that can be remitted

Perhaps an even more concerning change of position by HMRC is that the guidance has now been amended to clearly state that where the amount of the foreign income and gains used as security for a relevant debt exceeds the amount of the loan, if the full amount of the loan is brought to the UK the amount of the collateral treated as remitted is not capped at the amount of the loan. HMRC previously took the opposite view.

Take an example where a remittance basis user has secured a £1m loan to purchase a property in the UK and has offered his £3m offshore portfolio in Switzerland as collateral for the loan. If he then uses the entire £1m loan in the UK, HMRC’s position is that £3m of the offshore income and gains offered as collateral would be remitted to the UK.

If you have such an arrangement in place this will need to reviewed.

Last Friday, 25th June, we joined in sponsoring a LondonSports charity softball event, with other sponsors including Blick Rothenberg, Buzzacott, EY Frank Hirth, LGT Vestra US, London & Capital, MASECO Private Wealth and US Tax & Financial Services. There were more than 100 players partaking on the day in a 12 team tournament that raised significant funds for the charity.

Founded in 1986, LondonSports is the UK’s largest and longest established youth baseball and softball league and has registered and trained over 15,000 children to play baseball and softball in over 12,000 games. Their goal is to give every player a chance to learn about the sport, improve their skills and develop self-confidence and self-esteem, with a strong focus on the importance of teamwork and good sportsmanship.

As a non-profit organisation, LondonSports relies heavily on sponsorship so that the league is equally accessible for everyone, allowing boys and girls aged 5 to 17 the opportunity to learn to play baseball and softball in a safe and fun environment. This is the 3rd annual tournament and we look forward to participating again next year to continue to support in raising vital funds to aid the great work that the charity has been doing since 1986.

The LondonSports youth season runs from April to mid-June and if you know of any friends, family or colleagues who would be interested in playing softball or baseball at LondonSports then please find below a link to their website with all the information that you would need for next season – https://www.londonsports.com/page/about_us.html.

On 30^th March 2021, HMRC published its first crypto assets manual. A point to be noted is that this manual expands on and also replaces previous guidance provided.

Due to the success of the first decentralised cryptocurrency, Bitcoin (released 2009), whose market capitalisation increased from approximately $6.5 billion to $1 trillion in the last 5 years, the crypto assets manual provides a much-needed update of HMRC guidance as the market expands.

HMRC has confirmed in its crypto assets’ manual that:

• Most individual investors in crypto assets and cryptocurrencies will be subject to Capital Gains Tax (CGT) on gains and losses.
• Section 104 pooling applies for individuals, subject to the 30-day rule for ‘bed and breakfasting’. Different pooling rules apply for businesses.
• It will be rare to regard investing in crypto assets as trading, although ‘mining’ is likely to indicate a trading activity.
• Other tax treatments rather than trading or investment may need to be considered by companies such as loan relationships and the intangibles rules.
• A capital loss may be claimed in the event that a crypto asset becomes of negligible value. Evidence of any loss will need to be proved if the loss of the asset arises as a result of the accidental destruction of a private encryption key or fraud.
• Exchange tokens such as Bitcoin are located for tax purposes wherever the beneficial owner is resident.
• VAT may need to be considered.
• HMRC does not consider crypto assets to be currency or money.

Furthermore, we can also highlight some key principles from the manual for businesses:

• Trading:

• The use of cryptocurrencies as a form of exchange (i.e. exchange tokens) is permissible in the course of trade, therefore this may lead to a rise in corporation or income tax liability.

• For tax filing purposes, the value of the gain/loss will need to be converted into pound sterling in order to prepare a tax return.

• Chargeable gains:

• HMRC categorises exchange tokens as chargeable assets due to their capability of being owned and having a value that can be realised.

• A taxpayer holding crypto currency exchange tokens as an investment will be considered liable to pay CGT or corporation tax on any gains upon disposal.

• Employment tax:

• Employees receiving crypto assets as earnings are liable to income tax and NICs on the sterling value of the assets received.

• VAT:

• Businesses supplying goods and services in exchange for crypto assets are liable to account to HMRC for VAT for the sterling value of the exchange tokens at the point the transaction takes place.

• Stamp taxes:

• Stamp duty is defined as a tax that is charged on instruments that transfer “stocks or marketable securities” and HMRC’s view is that exchange tokens are unlikely to meet the definition of “stock or marketable securities”.

Transactions that involve cryptocurrency cannot be taxed in the same method as transactions made in sterling or an alternative foreign currency as HMRC does not consider cryptocurrency assets as money/currency.

Hence, it is essential that general principles are applied in order to establish whether a gain or loss has been made.

If you would like further advice on this matter, please contact one of our advisers.

Frontier Fiscal Services

The Internal Revenue Service (IRS) has extended the tax filing for individual tax returns for the 2020 tax year to MAY 17, 2021.

Please note key points below:

• First-quarter estimated tax payments for 2021 and corporation tax returns are still due on APRIL 15, 2021
• In response to the Federal Government’s deadline extensions for federal income tax filings and payments, many states are now extending deadlines for income, sales/use, property and/or other taxes. However not all have announced extensions yet.

The Tax Cuts and Jobs Act of 2017 brought in an increase to the lifetime exemption which is currently at $11.7 million per person for 2021. This exemption amounts are scheduled to sunset at the end of 2025, however under the Biden administration the change may come a lot sooner. We could see the exemption go back to pre-2018 levels of $5.5 million, but potentially could even be much lower at $3.5 million per person.

The main question here should these proposed changes come into place is, will they be retroactive? As the exemption works as a tax credit against estate and gift tax rather than an exemption this is likely to be the case, and the changes could come into place this year. It therefore important to discuss any potential gifts made in 2021 and what the possible changes could mean for you. There are ways to potentially mitigate the risk should the retroactive legislation come into force such as QTIP marital trust which allows you to make a Qualified Terminable Interest Property election at a later date if necessary, or setting up a trust with a formula allocation clause. This type of tax planning can be complicated and it is good to understand the impact of all options before making any decisions.

As part of the American Rescue Plan Act, signed into law on 11th March 2021, part of it’s aim towards individuals is to provide a $1,400 refundable tax credit to individuals ($2,800 for joint filers) with up to $75,000 in adjusted gross income (or $112,500 for heads of household and $150,000 for married couples filing jointly). It also provides $1,400 for dependents (both child and non-child).

As with most credits, there is a phase out threshold and those with incomes above $80,000 (or $120,000 for heads of household and $160,000 for married couples filing jointly) will find that the credit is phased out entirely.

However, for income between $75,000 and $80,000 (or $112,500 and $120,000 for heads of household and $150,000 and $160,000 for married couples filing jointly), the credit is reduced.

The credit will be paid out in advance like the Economic Impact Payments previously provided under the CARES Act and the COVID-related Tax Relief Act.

For this purpose, the IRS will use the most recent adjusted gross income in its system (2020 or 2019). If an individual qualifies for a larger payment using 2021 income, the difference will be claimed as a credit on the individual’s 2021 return itself.