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.

The main rate of corporation tax is currently 19% and it will remain at that rate until 1 April 2023 when the rate will increase to 25% for companies with profits over £250,000. The 19% rate will become a small profits rate payable by companies with profits of £50,000 or less. Companies with profits between £50,000 and £250,000 will pay tax at the main rate reduced by a marginal relief, providing a gradual increase in the effective corporation tax rate

A common form of estate planning in the US is for an individual to create and fund a Revocable Trust (sometimes referred to as a Living Trust or a Living Will). However, structures of this nature can be problematic for anyone with connections to the UK.

US Revocable Trusts are popular in the US because they represent a relatively simple means of avoiding probate following death. Typically, the Grantor (i.e. the Settlor) will have a right to all income together with a right to access capital on request. The Grantor will have significant retained powers (such as a power of revocation) and will often be the sole trustee during his or her lifetime. The terms of the Trust then set out how assets should devolve following the Settlor’s death. The structure is entirely tax neutral for US purposes with the assets being taxed as if they belong to the Settlor directly.

For individuals with connections to the UK, the analysis is not so straightforward. Significant UK Inheritance tax (IHT) complications can arise if:

• The Grantor is domiciled in the UK because any assets they contribute into a lifetime trust may incur an immediate 20% entry charge to IHT followed by ten year anniversary charges to IHT at rates of up to 6%(subject to available nil rate band allowance)
• The Grantor is not domiciled in the UK but contributes UK situated assets to their Revocable Trust as there may be a 20% entry charge to IHT on the value of those UK assets followed by ten year anniversary charges at rates of up to 6% (subject to available nil rate band allowances).

For those that have already set up Revocable Trust structures, all is not lost. Depending on the specific drafting it may be possible to argue that a Revocable Trust should be treated for UK purposes as a ‘bare trust’ or ‘nominee arrangement’. A crucial distinction exists because bare trusts and nominee arrangements are not within the relevant property regime, with the result that the adverse IHT implications referred to above are avoided. Essentially, we may be able to argue that there is not a taxable trust for UK purposes.

Therefore, If you have such an arrangement which has not been reviewed for UK tax purposes, we would advise a review be undertaken.

New Stamp Duty Land Tax (SDLT) rates for non-UK resident purchases of residential property will come into effect on or after 1 April 2021, this applies to both freehold and leasehold transactions which are completed in England and Northern Ireland.

The surcharge will apply to buyers who are non-UK resident individuals. The 2% surcharge will apply to a non-resident transaction. A transaction is a non-resident transaction if the purchaser is, or (if there is more than one purchaser) the purchasers include a person who is non-resident. Therefore, in the case of joint purchasers (other than spouses or civil partners, see below), if one of the purchasers is UK resident and one is non-resident, the transaction will be considered a non-resident transaction. The draft legislation contains tests to determine whether a person is UK resident or not UK resident for the purposes of the transaction. There are different tests for individuals, companies and trustees.

The additional 2% of tax will apply as a surcharge to the various standard SDLT rates, i.e. i) the standard rates for residential transactions; ii) the higher rates for the purchase of additional dwellings; iii) the 15% flat rate for high value residential transactions by companies; and iv) the rates for first time buyers that qualify for relief. This means that the top rate of SDLT will be 17% from 1 April 2021 and the calculation of the SDLT due a residential property purchase is set to become even more complicated than it is at present. The rules will not apply where the purchase is for less than £40,000, or, in the case of leasehold transactions, where the lease has 21 years or less to run or the purchased interest is reversionary on a lease that has more than 21 years to run.

IRS EXTENDS INDIVIDUAL TAX FILING TO MAY 17, 2021

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.

However, it would be much appreciated if you could provide your tax information to us as early as possible in order to file your tax return in a timely manner and ahead of the extended deadline.

We look forward to hearing from you soon.

Dear Member,

Our summary of the Chancellor’s 2021 Budget is now available on our website. Please see the link below.

Frontier 2021 Budget Summary

Following a very difficult year, Chancellor Rishi Sunak presented the 2021 Budget against a backdrop of economic uncertainty caused by the pandemic.

Our Budget Summary provides an overview of the key announcements arising from the Chancellor’s speech. Changes for businesses include a corporation tax rise to 25% from 1 April 2023 whilst individuals see no major changes to the income tax and capital gains tax rates.

Additionally, throughout the Summary you will find informative comments to help you assess the effect that the proposed changes may have on you personally.

If you would like more detailed, one-to-one advice on any of the issues raised in the Chancellor’s Budget speech, please do get in touch.

I look forward to hearing from you.

Yours sincerely,

Frontier Fiscal Services

Tel: 0207 332 2810
Fax: 0207 248 1122

www.frontier-fs.com

Gifting Assets Into Trust To Plan Against Future CGT Increases

On 11^th November 2020, The Office of Tax Simplification (OTS) published two proposals of recommendation to closely align the rates of CGT with income tax rates and also to reduce the annual CGT allowance.

Due to the current economic climate, there lies continued uncertainty in relation to the likely rises in CGT. However, there may be an opportunity to safeguard one’s asset from any future CGT changes if you were to gift assets into trusts.

Gifting assets into trusts before 6 April 2021

A donor who has gifted assets into a discretionary trust before 6 April 2021 will have until January 2022 to decided whether to let the CGT charge crystallise or hold over the gain to the trustees to pay CGT when they dispose of the asset.

The donor can review the position, also taking into consideration all the circumstances at the point the gain becomes reportable (i.e. in January 2022) rather than making a definitive decision now, in uncertain circumstances; this seems to be favourable as this sort of planning is valuable, particularly where CGT changes are anticipated.

Donors should be made aware that gifting into a trust may also come with other tax implications. A transfer of an asset from an individual into trust is a chargeable transfer for the purposes of inheritance tax (IHT) for the value above £325,000 per person, however, in some cases this can be mitigated if for example Business property relief is available. However, where you may wish to undertake some IHT planning anyway, this CGT planning may be an interesting additional consideration right now.

For those concerned about potential CGT rises this year, it is worth considering whether now might be the right time to consider making such gifts into trust. This is a good strategy in order to preserve a certain amount of flexibility and certainty when heading into this uncertain future.