As we are fast approaching the 5 April 2024 fiscal year end, now is a good time to consider your circumstances for general year-end tax planning for UK purposes. Particularly of note are certain milestones for non-UK domiciled individuals.

There are actions you may want to take before the end of the tax year. Detailed below are the main issues to consider for all taxpayers at this time of year. Note that for US persons there may be further considerations: –

Becoming Deemed Domiciled, resident for 7 out of the last 9 years or 12 out of the last 14 years

If you are approaching the date where you will be deemed domicile, having been UK resident for 15 out of the last 20 years, 12 out of the last 14 years or 7 out of the last 9 years, you may need to take urgent action before 05 April 2024.

Important note – Part tax years count as full tax years for this purpose.

Example 1 – Resident 7 out of the last 9 years

“A” arrived in the UK in the tax year ended 5 April 2018 (the 2017/18 tax year),”A” will have been UK resident for 7 out of the last 9 years as of 06 April 2024 and will need to pay the £30k remittance basis charge in order to claim the remittance basis for the tax year 2024/25.

Example 2 – Resident 12 out of the last 14 years

“B” arrived in the UK in the tax year ended 5 April 2013 (the 2012/13 tax year),”B” will have been UK resident for 12 out of the last 14 years as of 06 April 2024 and will need to pay the £60k remittance basis charge in order to claim the remittance basis for the tax year 2024/25.

Actions for Examples 1 & 2 – Review foreign income to assess whether the remittance basis is still favourable. Review offshore assets for UK compliance.

Example 3 – Deemed Domiciled

“C” arrived in the UK in the tax year ended 5 April 2010 (the 2009/10 tax year), “C” will have been UK resident for 15 out of the last 20 years as of 06 April 2024 and will become deemed domiciled for Income, Capital gains and Inheritance tax in the UK for the 2024/25 year onwards.

Actions for example 3 – Review inheritance tax position before deemed domicile status comes into effect. Review offshore assets for UK compliance.

Excluded Property Trust

• Establish an excluded property trust and settle assets into it before you become deemed domicile for IHT. This is most relevant for people who are close to becoming deemed domicile in the UK for tax purposes. Although can be appropriate for individuals who have been in the UK for shorter periods for a variety of reasons.

• A trust can lead to Income, Capital gains and Inheritance tax benefits based on your circumstances.

If this is something that you would like to consider we would advise you contact us as soon as possible, as typically at least one month lead time is required to consider and establish such an engagement.

Business Investment relief

• This allows the remittance of income taxable on the remittance basis.

• It is possible to invest into EIS or SEIS companies using this relief.

• It is possible to invest into your own business.

• It is possible to make investments into a property rental business.

• We are able to obtain HMRC advance clearance on transactions, thus attaining certainty on the non-taxation of remittances to the UK

Pensions

Many individuals utilise pensions as part of their overall tax planning strategy. At the end of the UK tax year, it is worth reviewing your pension contributions for the year and consider any optimisation as well as ensure you have not overstepped the mark, especially since HMRC have drastically reduced the amounts from historic levels that are relievable for tax for higher earners. Some of the key things to note are as follows:

• You are entitled to pay in up to £60,000 tax free per year, but this is tapered once your income exceeds £260,000 to a minimum of £10,000 allowance when your income exceeds £360,000.

• Unused allowances are carried forward for three years.

• Tax relief for pension contributions is claimed on your tax return where contributions are made net of tax.

• If you or your employer overpays into your pension you could be liable to an additional tax charge.

• From 6 April 2023 the lifetime allowance no longer applies – this was previously £1.073m

I would advise that you should review your position to avoid any pitfalls and optimise where necessary.

Basis Period Reform

The Finance Act 2022 introduced changes to how trading profits are allocated and taxed. The reform aims to allocate profits based on a time apportionment to the tax year, rather than the accounting date.

This adjustment impacts self-employed individuals and partners in trading partnerships if their accounting periods do not align with the tax year (considered aligned if falling between 31 March and 5 April). The changes will be effective from the 2024/25 tax year, with transitional rules in place for 2023/24.

Special rules apply for the first year of a trade – where the individual will be allocated profits from when the trade commenced up to the end of the tax year.

Individuals and partnerships may evaluate the benefits of aligning their accounting period with the tax year to potentially save on accounting and associated costs.

In cases where additional liabilities arise in the transitional year, there is an option for potential relief by spreading the additional profit over a 5-year period.

US mutual funds and other non-UK funds

If you are approaching 7 years or 15 Tax years since you arrived in the UK, the remittance basis of taxation may not be the most efficient option or no longer available after 15 years. This means that your non-UK income may be brought into the scope of UK taxation. This can lead to very negative tax Implications for UK tax purposes, if you have not reviewed your investment portfolio and taken any relevant action. Some keys issues to note:

• It is important to review your investment portfolio, there may be changes required within your portfolio to ensure that your investments are UK efficient. For example the sale of a US mutual fund (non-reporting fund for UK purposes) leading to a gain, may be liable to income tax(45%) on such income gains, as well as the fact that other losses from other mutual funds may not be allowable against such gains. It is imperative to review your portfolio in such circumstances.

• There may be other tax mitigation strategies that can be enacted before the assets become liable to UK taxation.

It is essential that you review your portfolio, especially if you are nearing the end of the 7 year or 15 tax year window.

Inheritance Tax and US Estate tax implications

UK Inheritance Tax (IHT) is assessed on the estate of a deceased individual as well as certain gifts you make whilst you are alive, however, Domicile status can have a significant impact on the exposure to UK Inheritance Tax.

The US estate and gift tax system works in a different way, providing each individual a Lifetime allowance of $13.61m (2024) which can be used at death, although is reduced for taxable lifetime gifts. The annual tax-free gift exclusion per donee is $18,000 (2024). Note that the current estate exemption is due to lapse at 31 December 2025 and will revert to a lower amount unless the provisions are extended.

Both systems need to be navigated to ensure effective planning, however with the generous US lifetime allowance there may be no tax liability of a gift for US purposes, however there are certain filing requirements if a US person makes a gift of more than $18k or receives a gift from a non-US person.

• Broadly, each UK individual has a nil rate IHT allowance of £325,000 (this can be increased to £500,000 where the estate includes your primary residence). Assets in the estate in excess of the tax free allowance are generally charged at 40%.

• Effective planning may include setting up a trust, gifting assets, changing the composition of the estate to include exempt assets.

• Additionally certain gifts can be made tax free each year.

Family Investment Company (FIC)

A family investment company (FIC) is a private limited company which is used as a long-term investment vehicle. It Can provide an effective way to shelter income and assets from higher rates of taxation and Inheritance Tax. Some of the key benefits of an FIC are as follows:

• The FIC can retain profits for investment rather than those profits being drawn out and being subject to higher rates of personal tax in the hands of the shareholders.

• The FIC can be used as an effective tool to manage the passing down of assets to future generations in a controlled and tax efficient manner e.g. gifting non-voting shares to mature offspring in order to retain control of assets, whilst allowing assets to pass down to children.

Before an FIC is implemented, one must carefully consider if it is an appropriate strategy for you and your family’s long-term circumstances. I would advise that before implementing such a strategy you must seek tax and possibly legal advice.

Excess Foreign tax credits (FTCs) – For US Taxpayers

Excess FTCs arise due to the fact UK tax rates are higher that US tax rates, a US person is able to carry these excess credits forward for a period of 10 years. These excess credits can be useful in a number of scenarios, not limited to the opportunities raised in this article.

In conjunction with much of the planning detailed above and below, a review of your excess FTCs must be carried out to understand the impact from both a UK and US tax perspective.

For example, you may generate a UK tax refund by making an EIS investment, however you could be in scenario where you have to pay some or all of the refund back to the IRS, due to a lack of UK tax paid that year or excess FTCs.

Investors Relief

Investors’ Relief reduces the amount of Capital Gains Tax on a disposal of shares in a trading company that is not listed on a stock exchange. It applies to shares that are issued on or after 17 March 2016 that are disposed of on or after 6 April 2019, as long as the shares have been owned for at least 3 years up to the date of disposal. It is not usually available if you or someone connected with you is an employee of the company. Qualifying capital gains for each individual are subject to a lifetime limit of £10 million.

If you’re entitled to Investors’ Relief, qualifying gains up to the lifetime limit applying at the time you make your disposal, will be charged to CGT at the rate of 10%.

The conditions for qualification are broadly:

• They are ordinary shares in the company

• You subscribed for them in cash and they were fully paid up when issued

• The company is a trading company or the holding company of a trading group

• None of the company’s shares are listed on a stock exchange

• Neither you nor any person connected with you is an employee of the company or of a company connected with it

It is essential that a detailed review of the investment is undertaken to confirm qualification for this relief.

Other Opportunities

If you are interested in further tax planning, then the following tax-efficient investments are also available. If you are considering any tax planning opportunities for the future, please get in touch. We have provided an overview below but please note that there are qualifying conditions and limits on these investments. In addition, clients that are US citizens may need further considerations.

Please do not hesitate to contact our team here at Frontier Group and we are happy to arrange a consultation.

Frontier Fiscal Services Limited

The federal gift, estate and generation-skipping transfer (GST) tax exemptions for 2024 are historically high and present significant tax-free gifting opportunities next year. Exemption Amount Increasing to $13,610,000 in 2024. This means that, beginning in 2024, you will be able to transfer $13,610,000 to beneficiaries during your lifetime and at death without incurring gift or estate tax. If you’re married, you and your spouse together may transfer $27,220,000. If you have previously maximized lifetime gifts under the current limits, additional tax-free gifts may be made in 2024 totalling $690,000 per individual or $1,380,000 per married couple.

The GST tax exemption also will increase to $13,610,000 ($27,220,000 per married couple) in 2024. Strategic gifts to trusts for the ultimate benefit of grandchildren or more remote descendants may be made in 2024 to leverage the increased GST exemption.

The annual exclusion amount is also increasing in 2024 and you will be able to make tax-free gifts up to $18,000 (or $36,000 for a married couple splitting gifts) to an unlimited number of recipients. Finally, the special annual exclusion from gift tax on gifts to a non-U.S. citizen spouse will increase to $185,000 in 2024.

It is important to note that the increased lifetime gifts and estate tax exemption was enacted through the Tax Cuts and Jobs Act of 2017 – this is due to sunset on January 1, 2026. Unless congress acts before this date, the exemptions will revert back to the 2017 levels with an inflation adjustment (likely to be around $7 million for individuals and $14 million for married couples).

As things currently stand, it is uncertain whether these increased exemptions will be extended by congress – it would be prudent to consider planning for lower exemptions from 2026.

Please contact our team if you require further information.

The new year brings with it new tax brackets, deductions and limits that will impact your 2024 tax return. For basic tax planning, it is good to be aware of the changes so that you can plan for the year ahead. We have outlined some of the key changes below.

Although the marginal tax rates remain unchanged the federal tax brackets have all increased for 2024. We will see the top tax bracket (37% tax rate) increase to $609,350 for single filers and $731,200 for those who are married filing jointly.

The standard deduction for all has also increased. Single filers will receive a standard deduction of $14,600, up by $750, while married filing jointly standard deduction will be $29,200, up by $1,500.

The Foreign Earned Income Exclusion for 2024 will be $126,00, up from $120,000.

There have also been changes in how much you can contribute to your retirement plan. You can contribute up to $23,000 into your 401k plan. The annual contribution limit for IRA’s has also increased to $7,000 ($8,000 if you are aged 50 and over).

We will also see an increase in the Estate Tax lifetime exclusion from $12,920,000 to $13,610,000. The annual gift exclusion has also increased from $17,000 to $18,000 meaning a married couple can now make a gift of up to $36,000 without using their Estate tax exclusion. We have covered this in some more detail below.

It is also important to note that the IRS has updated their penalties for late filing of Tax Returns. The late filing penalty is 5% of your unpaid taxes for each month your return is late, up to a maximum of 25%. In 2024, if your tax return is not filed within 60 days of the due date, you’ll be charged a minimum late filing fee of $510 or 100% of taxes owed, whichever is lower. The penalty for late payment of taxes remained unchanged and is based on the amount of time your overdue taxes remain outstanding. This number will not exceed 25% of your unpaid taxes. For failing to pay the amount shown as tax on your tax return, you’ll be penalized 0.5% of the unpaid taxes for each month or part of the month the tax remains unpaid. As always it is important to ensure your taxes are paid on time and your Tax Returns and tax forms are filed on time to avoid penalties. Please keep an eye out for our email reminders throughout the year.

We will be happy to answer any questions you have on the 2024 changes so feel free to get in touch.

On November 15, 2023, the U.S. Tax Court held in YA Global Investments v. Commissioner that a non-U.S. private equity fund (YA Global) with a U.S. asset manager that bought equity and convertible debt of U.S. portfolio companies was engaged in the conduct of a trade or business within the United States for U.S. federal income tax purposes, all of its income was “effectively connected” to that trade or business, and the fund (which was treated as a partnership for U.S. federal income tax purposes) was liable for penalties and interest for failing to withhold with respect to its non-U.S. corporate feeder fund partner.

Background

YA Global was a Cayman Islands partnership. Yorkville Advisors (“Yorkville” or the “manager”) was YA Global’s sole general partner and investment manager. Yorkville’s employees worked from within the United States. Yorkville received a 2% management fee and a 20% incentive fee based on YA Global’s profits. However, Yorkville was also entitled to retain any fees it received directly from the portfolio companies to the extent of its overhead. Any excess fees received by Yorkville were offset against management fees owed to Yorkville, or paid to YA Global.

The Tax Court’s Opinion

YA Global’s U.S. Trade or Business

Having concluded that YA Global received fees for the provision of financial services, the court summarily held that YA Global was not a mere investor and did not qualify for the “stock and securities” trading safe harbor of section 864(b)(2). Therefore, it held that YA Global was engaged in a trade or business in the United States.

Section 475 (Mark-to-Market)

The Tax Court next held that YA Global was a dealer in securities. A dealer in securities under section 475 is required to mark-to-market its securities and treat the gain or loss as ordinary income or loss.

Effectively Connected Income

The court next held that all of YA Global’s income allocable to non-U.S. partners during the tax years at issue was effectively connected with the conduct of its U.S. trade or business and, therefore, subject to withholding.

The UK Supreme Court’s recent decision in HMRC v Vermilion provides crucial guidance on the taxation of share options or securities granted to employees or directors.

The case involved Mr. Noble, an individual investor whose company, Quest Advantage Ltd, advised Vermilion on a turnaround strategy. When project costs exceeded the budget, Vermilion granted Quest an option to acquire shares instead of payment. A year later, a restructuring led to the cancellation of the original option and the issuance of a new one over a different class of shares. Nine years later, Mr. Noble exercised the new option, seeking confirmation from HMRC that the gain was subject to capital gains tax. HMRC decided that the gain was subject to income tax. Mr Noble appealed the decision and the dispute was ultimately heard in the UK Supreme Court.

The relevant law, under section 471(1) of the Income Tax (Earnings and Pensions) Act 2003, imposes income tax on share acquisitions through options linked to an individual’s office or employment. Section 471(3) extends this to include options made available by an employer or a person connected to the employer. The Supreme Court ruled in favour of HMRC, establishing a “bright line” rule that if an employer or connected person provides the right to acquire a share option, it is conclusively treated as employment-related income.

The court rejected the argument that section 471(3) could lead to unjust results, as highlighted in Fowler v Revenue and Customs Comrs. The decision emphasizes that the employer’s reason for granting the option is irrelevant; if the employer provides the option, it is treated as employment-related security, subjecting gains to income tax.

This decision has far-reaching implications, particularly for founders, non-executive directors, and directors acquiring securities as investors. While the judgment acknowledges the potential for unjust results, it clarifies that section 471(3) should not be applied to produce absurd outcomes. Taxpayers should carefully consider the implications before implementing arrangements involving shares or share options granted to UK employees and officers. Moreover, the risk extends beyond HMRC challenges, as potential buyers or investors may scrutinize such arrangements during diligence exercises.

October 6, 2023

In the dynamic landscape of UK tax law, domicile remains a crucial factor, and recent cases shed light on the courts’ approach to determining domicile status. This update highlights key insights from a notable case, Strachan v HMRC (July 2023).

Strachan v HMRC: Challenging Domicile of Choice

Mr. Strachan’s case revolved around his claim to have abandoned his domicile of origin in England, establishing a domicile of choice in Massachusetts for tax purposes. He filed self-assessment tax returns (SATRs) for five tax years based on this claim, triggering HMRC enquiries. The central question was the time limit for investigation.

Key Points:

1. Domicile of Choice Criteria: The court emphasized that a domicile of choice is established when an individual voluntarily fixes their ‘sole or chief residence’ in a jurisdiction with the intention of residing there indefinitely.
2. Evidence Requirements: Acquiring a domicile of choice demands ‘clear, cogent, and compelling evidence.’ In Mr. Strachan’s case, having a home in Massachusetts was insufficient; the totality of relevant factors needed evaluation.
3. Careful Consideration: Determining chief or principal residence requires a meticulous examination of all facts and circumstances.

Factors Against Mr. Strachan:

1. Time Spent in London: Mr. Strachan spent the majority of each year in London, not Massachusetts.
2. Work Importance: His paid work, even post-retirement, tied him to London due to its vital importance.
3. Official Documents: Official documents listed his London address, including his US tax return, wills, and power of attorney.
4. Charitable Donations: Significant donations to UK charities and active engagement in London’s social, cultural, and sporting life.

FTT’s Verdict:

The First-tier Tax Tribunal (FTT) ruled that Mr. Strachan retained his domicile in England, emphasizing his intent to move to Massachusetts only if unable to continue his London life. The FTT stressed the need for up-to-date advice in the face of significant life changes.

Deemed Domicile and Lessons Learned:

Mr. Strachan’s assumed domicile of choice led to deemed domicile, highlighting the importance of regular advice updates. While the FTT found him careless, HMRC failed to prove that tax loss would be avoided with timely advice, limiting the investigation window.

Takeaway: This case underscores the critical role professional advice plays in navigating changes impacting domicile status. Taxpayers are reminded to seek guidance, especially during significant life changes, to ensure accurate tax assessments.

HMRC is inviting taxpayers to make a voluntary disclosure of Income Tax or Capital Gains from crypto assets.

Crypto assets include exchange tokens, e.g. bitcoin, NFTs (non-fungible tokens) and utility tokens.

There are currently two voluntary disclosure options being publicised. The first option is known as the digital disclosure for those who are not up to date with their tax affairs, or the second option is the contractual disclosure facility for those who want to admit tax fraud and want to avoid criminal sanctions.

Most individual investors will be subject to Capital Gains Tax (CGT) on gains and losses on crypto assets. For CGT purposes, a capital loss may be claimed if a crypto asset becomes of negligible value.

Digital disclosure

HMRC gives taxpayers three options to disclose to get their tax position up to date:

• Despite taking reasonable care to make sure you paid the right amount of tax.
• Through carelessness
• Through deliberate actions

Contractual disclosure facility

The contractual disclosure facility: if you want to make a disclosure because your deliberate behaviour has caused a loss to HMRC of any of the taxes, duties, levies, or payments it administers.

Please contact our team for further information.

In light of the recent government autumn statement, we would like to bring to your attention the key updates that may impact your financial planning. The government has responded to the prevailing economic challenges, and the Chancellor has outlined three primary priorities: stability, growth, and public services. To support these priorities, a series of fiscal measures have been proposed. Here is a summary of the key points:

• Income tax rates will remain the same for 2024/25 and income tax personal allowance and basic rate limit will remain fixed at £12,570 and £37,700, respectively until 2028.

 

• The Chancellor has confirmed that the capital gains tax (CGT) annual exempt amount will be reduced from £6,000 to £3,000 from 6 April 2024 for individuals.

 

• Dividend tax rates will remain the same however the government will reduce the Dividend Allowance from £1,000 – £500 from 6 April 2024.

 

• Major changes to National Insurance Contributions (NICs) as the government will cut the rate of Class 1 NICs from 12% to 10% from 6 January 2024.

 

• Class 2 self-employed NICs will be abolished from 6 April 2024. Self-employed individuals will retain access to the contributory benefits, contingent upon their profit levels.

For a detailed overview of these changes, please refer to our summary HERE. If you have any questions or require further clarification, feel free to contact us.

Taxpayers, and the accounting and legal professionals who represent them, need to be prepared as the Internal Revenue Service has begun compliance work on those who own and trade in cryptocurrencies.

Crypto compliance could be a part of the agency’s push to utilizing artificial intelligence as part of the compliance process, noting that with everything else on the agency’s plate, the IRS “literally doesn’t have the manpower.” This could make AI a tool for crypto compliance.

The Financial Crimes Enforcement Network (FinCEN) has issued a final rule regarding beneficial ownership reporting under the Corporate Transparency Act (CTA). Starting January 1, 2024, domestic (U.S.) and foreign (non-US) companies are subject to novel reporting requirements concerning beneficial owners. The rule intends to protect U.S. national security while strengthening the integrity and transparency of the U.S. financial system. It will aid in detecting criminal actors such as oligarchs, kleptocrats, drug traffickers, human traffickers, and those who would use anonymous shell companies to hide their illicit proceeds.

The final rule has an extended timeline for implementation. The rule goes into effect on January 1, 2024. Reporting companies established or registered before January 1, 2024, will have until January 1, 2025, to file their initial reports. However, any reporting companies established or registered after January 1, 2024, will have 30 days to file their initial reports. Following the initial report’s filing, current and new reporting companies must provide updates within 30 days of any change in beneficial ownership information. FinCEN is dedicated to enforcing these statutory duties and imposes significant penalties for non-compliant reporting companies.

The final rule defines” reporting companies “as domestic and foreign corporations registered to do business in any state or tribal jurisdiction in the United States.