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Considering Renouncing Your US Citizenship?

The UK will be heading to the polls on 4 July 2024 as the Government announced the early General Election. There are many who have been closely monitoring the situation for updates on the potential tax implications particularly for non-domiciled individuals.

Following the Budget back in March – please see the following link for our initial summary of the Conservatives announced changes due to come into force from 5 April 2025.

UK Government Non-Dom Reform

Labour issued a response to these changes back in April – the main differences in stance are as follows:

• Consider incentives for new arrivers to invest in the UK
• Want to adapt the plans for the transitional relief
• Not implement the 50% discount on foreign income remitted during 2025/26
• Not allow grandfathering of excluded property trusts set up before 6 April 2025

The comments from Labour are useful to obtain a sense of the intentions, however with no technical explanation the brief statement does not provide full clarity. Specifically regarding the treatment of excluded property trusts set up pre-April 2025, this would be very challenging to achieve through legislation given the complexities that arise with offshore settlements.

The impact of the early General Election is there will not be any draft legislation published this summer as originally expected and the consultation on the proposed inheritance tax changes will also be delayed.

At this stage, both the Conservatives and Labour have committed to non-dom reform in one version or another which means we can be fairly confident that there will be upcoming changes. Providing there is a clear majority in the election we will know which version is likely to be implemented; the uncertainty lies in the timing and effective date.

Once the Government session resumes, the main possibilities are as follows:

• An Autumn Budget is announced and will confirm the reforms – although this would leave the Government very little time to prepare draft legislation and the planned IHT consultation.
• The changes will be confirmed in a Spring Budget for 2025.
• The changes may be postponed for longer whilst legislation is drafted and consultations undertaken.

If history has any lessons, it cannot be guaranteed that either party would implement the changes in full as announced, however it would be prudent to assume this will be the case until the position is clear.

Should you wish to discuss the potential impact for your affairs please do reach out to your usual Frontier contact and we will be happy to discuss this with you

We bring to your attention the latest warning from the Internal Revenue Service (IRS) regarding fake charities and tax-related identity fraud. This advisory is part of the ongoing “Dirty Dozen” tax scams series, emphasizing the importance of vigilance and caution, particularly during times of natural disasters and tragic events.

Key Points:

1. Scammers often exploit tragic events by posing as charitable organizations to solicit donations. They may also seek sensitive personal and financial information under the guise of charity work.
2. Taxpayers should be aware that deductions for charitable donations are only valid when directed towards IRS-recognized tax-exempt organizations. Utilizing the Tax-Exempt Organization Search (TEOS) tool on IRS.gov can help verify the legitimacy of charities.
3. Tactics employed by scammers may include email phishing, spoofed caller IDs, and targeting vulnerable groups such as seniors and individuals with limited English proficiency.

How to Protect Yourself:

1. Refrain from making payments under pressure and avoid charities that request gift card numbers or wire transfers.
2. Verify the legitimacy of any charity before making donations and avoid sharing excessive personal information.
3. Report abusive tax practices and incorrect tax filings by using the online Form 14242 or submitting a completed paper Form 14242 to the IRS Lead Development Center.

It’s crucial to remain vigilant and informed about potential scams, especially those targeting charitable giving and tax-related identity fraud. By following the IRS guidelines and exercising caution, we can collectively combat fraudulent activities and protect ourselves and our communities.

State taxes can be confusing for US expats that are living abroad. Many will ask ‘Do I need to pay State taxes even though I am living abroad? The answer to this, unfortunately, is not black and white.

Each US State has different rules as to who qualifies as a state resident and what type of income would be taxable in that State. Some States have no income tax charges, such as Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Other States will have varying rules and if you have any affiliation to these States, such as you lived there before moving abroad, you have some workdays there, or you own a property there, it is important to understand the rules and check how they may apply to you.

For example, in some States if you are considered domiciled in the state, you could still be liable to State taxes even though you are not physically present there. In some States you could be liable to State taxes by travelling to and working within the State, even if this is just a few days. This would include remote working from a home you may still maintain within the State. If you are unsure if any of the State income tax rules will apply to you, please contact our team and they will be happy to assist you.

Last week we saw millions of Americans rushing to file their taxes before the April 15th deadline. New surveys have found that nearly one-third of U.S. expats have plans to renounce their American citizenship due to the extra filings rules which are subsequently making some expats question their citizenship.

Between 2023 to 2024, the percentage of expats renouncing their citizenship rose from 20% to 30% due to the burden of managing and filing their U.S. taxes.

It has been proven difficult to many Americans living outside of the U.S. due to the strict filing requirements whereby income taxes must be paid on all sources of worldwide earnings. Although there may be some leeway in avoiding double-taxation by applying foreign tax credits as well as claiming a foreign income exclusion, expats may spend more money and time to file taxes in two counties every year.

The Report of Foreign Bank and Financial Accounts (FBAR) may be another factor that encourages expats to renounce their US citizenship. Expats will need to file FBAR forms if their combined account values of their non-US bank accounts exceed $10,000 any time during the tax year – failing to report this can trigger a hefty penalty.

Many have called for the taxing regime to be streamlined and simplified, therefore, easier to navigate and keep up with their tax filings – this would minimise the stress caused to expats and would make tax filing more manageable. This option would be more practical to navigate as opposed to completely renouncing their citizenship as this cannot be easily reversed.

Please contact our team for more information

In this article, we delve into the significant announcements made in the UK’s Spring Budget 2024 and their direct impact on the real estate sector. Our focus is on dissecting these developments to provide valuable insights for real estate professionals and investors navigating the evolving landscape of UK property markets.

1. Reserved Investor Funds (RIFs):

The government has introduced Reserved Investor Funds (RIFs), a new tax-transparent unauthorised vehicle aimed at enhancing the UK’s funds regime. RIFs are expected to be particularly attractive for investment in commercial real estate. The Finance (No 2) Bill 2024 will define RIFs and outline their tax treatment. RIFs will be subject to Stamp Duty Land Tax (SDLT) as companies.

1. Replacing Tax Rules for Non-UK Domiciliaries:

The Chancellor announced a significant reform of the UK’s regime for taxing non-domiciliaries. The remittance basis of taxation will be replaced with a simpler residence-based regime effective from 6 April 2025. New arrivals to the UK opting into the regime will enjoy a four-year grace period of tax exemption on foreign income and gains.

1. Changes to Anti-Avoidance Legislation: Transfer of Assets Abroad Provisions:

Legislation will be introduced to partially reverse a Supreme Court decision, ensuring that anti-avoidance rules apply to certain indirect transfers of assets abroad by UK resident individuals through companies. These changes will take effect from 6 April 2024.

1. . Stamp Duty Land Tax — Abolishing Multiple Dwellings Relief (MDR):

The Spring Finance Bill 2024 will abolish Multiple Dwellings Relief (MDR) for SDLT, effective from 1 June 2024. MDR allows bulk purchase relief for two or more dwellings in a single transaction. However, it will still apply to contracts exchanged on or before 6 March 2024.

These updates are crucial for real estate investors and professionals operating in the UK market. Stay informed to navigate the evolving landscape effectively.

The 2024 UK Budget was obviously more politically focused considering the upcoming General Election. The reforms to domicile, remittance basis and inheritance tax are due to be implemented from 6 April 2025 which would be following the outcome of the General Election – which adds uncertainty for the final rules.

At this stage the draft legislative changes are yet to be published. It is therefore important to note that there will likely be further amendments/changes to the planned reforms following the General Election and legislative review process before these are implemented in April 2025.

Announcement and UK Treasury documents:

The current plans as per the Budget announcement and Treasury technical note for implementation as of 6 April 2025 are as follows:

1. The UK will move away from the historic principle of domicile and move to a residency-based system of taxation.
2. The remittance basis of taxation will be abolished.
3. A new 4-year relief from taxation of non-UK income will become available for individuals that become UK resident after a period of non-residency of at least 10 years.
4. Overseas Workday Relief (OWR) will be retained with some modifications which would allow claimants to remit the non-UK employment income without charge.
5. Trust protections for settlor interested trust structures will no longer be available in respect of income and capital gains tax.
6. Inheritance Tax will also move to a residency-based system.

Transitional relief:

The following transitional reliefs have been documented in the Treasury technical note:

1. Temporary Repatriation Facility – the intention is to allow a reduced rate of 12% tax on remittances of non-UK and gains arising before 6 April 2025 in the next two tax year [2025-26 and 2026-27].
2. For individuals that move from the remittance basis of taxation to worldwide basis at 6 April 2025 there is planned to be a relief applying for the 2025-26 tax year only. The proposal is that for people in this position they will receive a deduction of 50% of their foreign income for tax purposes. Note that capital gains are not currently included in this relie
3. Capital Gains Tax Rebasing – For people that have claimed the remittance basis in the past and are not UK domiciled or deemed domiciled at 5 April 2025 there will be rebasing available for capital gains tax purposes. The rebasing date is planned to be 5 April 2019.

Inheritance Tax:

It is important to note that the announced inheritance tax changes, already subject to the General Election outcome and legislative drafting, are also subject to a separate IHT consultation before the planned implementation on 6 April 2025.

The current announced changes are as follows:

1. The concept of domicile will be abolished and replaced with a residency-based system.
2. Individuals would become subject to UK inheritance tax on their worldwide assets after being resident in the UK for 10 years.
3. Once an individual becomes subject to UK inheritance tax on their worldwide assets, they will remain in the scope of UK inheritance tax for 10 years after they become non-UK resident – known as the “tail” provision.
4. It is understood that UK situs assets will remain in charge of UK inheritance tax regardless of residency.
5. The Treasury technical note states that non-UK property settled by a non-domiciled individual before 6 April 2025 into trust will continue to receive inheritance tax protection going forward. However, it important to note that if the trust is settlor interested the income and capital gains protections will no longer apply and will therefore be allocated to the UK resident settlor.
6. The tax treatment of new trusts settled after 6 April 2025 will be subject to the proposed consultation.

Some individuals may consider trust planning ahead of the planned changes depending on their circumstances to lock in IHT protection. However, this should be carefully reviewed due to the planned changes to settlor interested trust protections.

Following the UK Budget and the various announcements regarding Non-Doms and the remittance basis, please see below our summary on the various items as it currently stands:

Firstly, it is important to note that this Budget was obviously more politically focused considering the upcoming General Election. The reforms to domicile, remittance basis and inheritance tax are due to be implemented from 6 April 2025 which would be following the outcome of the General Election.

At this stage there is only the Budget announcement and the UK Treasury technical note to rely on – the draft legislative changes are yet to be published. It is therefore important to note that there will likely be further amendments/changes to the planned reforms following the General Election and legislative review process before these are implemented in April 2025.

Announcement and UK Treasury documents:

The current plans as per the Budget announcement and Treasury technical note for implementation as of 6 April 2025 are as follows:

 

• The UK will move away from the historic principle of domicile and move to a residency-based system of taxation.

• The remittance basis of taxation will be abolished.

• A new 4-year relief from taxation of non-UK income will become available for individuals that become UK resident after a period of non-residency of at least 10 years.

• Overseas Workday Relief (OWR) will be retained with some modifications which would allow claimants to remit the non-UK employment income without charge.

• Trust protections for settlor interested trust structures will no longer be available in respect of income and capital gains tax.

• Inheritance Tax will also move to a residency-based system.

Transitional relief:

The following transitional reliefs have been documented in the Treasury technical note:

• Temporary Repatriation Facility – the intention is to allow a reduced rate of 12% tax on remittances of non-UK and gains arising before 6 April 2025 in the next two tax year [2025-26 and 2026-27].

• For individuals that move from the remittance basis of taxation to worldwide basis at 6 April 2025 there is planned to be a relief applying for the 2025-26 tax year only. The proposal is that for people in this position they will receive a deduction of 50% of their foreign income for tax purposes. Note that capital gains are not currently included in this relief.

• Capital Gains Tax Rebasing – For people that have claimed the remittance basis in the past and are not UK domiciled or deemed domiciled at 5 April 2025 there will be rebasing available for capital gains tax purposes. The rebasing date is planned to be 5 April 2019.

Inheritance Tax

It is important to note that the announced inheritance tax changes, already subject to the General Election outcome and legislative drafting, are also subject to a separate IHT consultation before the planned implementation on 6 April 2025.

The current announced changes are as follows:

• The concept of domicile will be abolished and replaced with a residency-based system.

• Individuals would become subject to UK inheritance tax on their worldwide assets after being resident in the UK for 10 years.

• Once an individual becomes subject to UK inheritance tax on their worldwide assets, they will remain in the scope of UK inheritance tax for 10 years after they become non-UK resident – known as the “tail” provision.

• It is understood that UK situs assets will remain in charge of UK inheritance tax regardless of residency.

• The Treasury technical note states that non-UK property settled by a non-domiciled individual before 6 April 2025 into trust will continue to receive inheritance tax protection going forward. However, it important to note that if the trust is settlor interested the income and capital gains protections will no longer apply and will therefore be allocated to the UK resident settlor.

• The tax treatment of new trusts settled after 6 April 2025 will be subject to the proposed consultation.

At this time the situation is very fluid and subject to revisions/clarifications, we will continue to closely monitor any new information as it becomes available and will provide updates as appropriate.

Should you wish to discuss the potential impact for your affairs please do reach out to your usual Frontier contact and we will be happy to discuss this with you.

After much speculation Jeremy Hunt has now announced major changes to the non dom rules and remittance basis of taxation as we know it. The government will abolish the current remittance basis of taxation for UK resident non-domiciled individuals and this will be replaced with a new 4 year foreign income and gains regime. These changes will impact many who have come, or are planning, to live and work in the UK. Below is a summary of the key changes that will take place from 6^th April 2025:

 

Non Dom Changes

 

• The new 4 year foreign income and gains (FIG) regime will be available to individuals who become resident after a period of 10 years of non-residence. Qualifying individuals will not pay tax on FIG arising in the first 4 years of becoming UK tax resident and will be able to bring these funds to the UK free from any additional charges.
• Individuals who on 6^th April 2025 have been tax resident in the UK for less than 4 years will be able to use this regime for any tax year of UK residence in the remainder of those 4 years.
• Individuals who are not eligible for the new regime and who will move from the remittance basis to the arising basis on 6^th April 2025 will, for 2025/26 only, pay tax on 50% of their foreign income. This reduction will not apply to foreign chargeable gains.
• Individuals who have claimed the remittance basis of taxation will have the option to rebase the value of capital assets they held personally at 5^th April 2019 to the value of the asset at that date.
• Those who have been taxed on the remittance basis will be able to elect to pay tax at a reduced rate of 12% on remittances of pre-6^th April 2025 foreign income and gains under a new Temporary Repatriation Facility.
• Overseas workday relief will continue to be available for the first 3 years of UK residence for those who are eligible for the 4 year FIG regime.  The relief will be simplified for those who are eligible, allowing relief even if earnings related to overseas work are brought to the UK.

 

 

Trusts

 

There are also major changes taking place to settlor-interest trust structures. Under the current rules, trusts settled by non-UK domiciled individuals benefitted from a ‘protected’ trust status whereby income and gains within the trust were free from UK income tax and CGT. From 6^th April 2025 this protected trust status will be removed for all current non-domiciled and deemed domicile individual who do not qualify for the 4 year FIG regime.

 

 

IHT

 

It is also important to note that the government intends to moved IHT from a domicile-based system to a residence-based system. This will be subject to consultation and we will be able to provide more detail on how this may impact you in due course.

 

Other changes to other aspects of taxes have also been announced and you will be able to find more details on this in our budget summary below:

 

Frontier Budget Summary 2024

 

Should you wish to discuss any of these changes or would like to understand how the changes may impact you, please do get in touch.

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