April 25, 2022
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The IRS has issued guidance on the topic of “relevance”, and some of the impacts it has had in the area of pre-immigration planning. The guidance addresses issues pertaining to so-called “check the box” elections, where non-US entities can designate their classification – as a corporation, partnership, or disregarded entity – for the purposes of US federal tax.

In summary, the IRS has clarified that in the case of a foreign eligible entity whose classification was never relevant, the initial filing of a Form 8832 should be deemed as an initial classification election. Notwithstanding the form of the election as an initial classification election, the impact of the election will be to trigger the deemed consequences that attach to a change in classification, as was outlined in the initial guidance from the IRS that was released in 2021. Further, the IRS confirmed in their frequently asked questions that although such an initial election will impact the consequences of a change in classification, such an entity will not be barred under the 60-month limitation from making a subsequent change in classification.

Please contact our team for further information.


April 25, 2022
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The US gift and estate tax regime remains unchanged at present. However, Inflation adjustments for certain exclusion and exemption amounts have automatically been applied (as of 1 January 2022):

  • The ‘unified’ lifetime gift and estate tax exemption amount (applicable to US citizens and most green card holders) has increased from $11,700,000 to $12,060,000.
  • The exemption amount for non-US domiciled individuals remains as is at only $60,000 for their US situs assets.
  • The annual exclusion amount for gifts to non-spouses has increased from $15,000 to $16,000 per recipient.
  • The annual gift exclusion amount for gifts to non-US spouses has increased from $159,000 to $164,000.

The maximum gift and estate tax rate remains at 40% of the fair market value of the relevant assets.

Please contact our team if you have any questions.


April 25, 2022
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Whether you are receiving distributions from a US trust as a beneficiary or you or your family are considering estate planning in the US; UK resident individuals carefully need to consider the impact of such events. For UK/US individuals the tools that work in the US may not necessarily be tax-efficient in the UK. It is important therefore that any US estate plan that involves UK individuals is sensitive to UK tax rules.

Why Trusts Can Be Beneficial

In simple terms leaving assets in a US Trust by US person, may mean the assets are outside the scope of UK Inheritance tax (IHT)whereas making the gifts directly to a UK domiciled beneficiary will mean the assets come into the UK IHT tax net.

Due to the fact that, currently a US person has approximately $12m ($24m between husband and wife) of lifetime allowance for estate tax purposes, there is a significant mismatch between UK and US death taxes. The UK the nil rate IHT band is £325k per individual, although the UK effectively has an unlimited gift allowance.

Structured carefully, that trust may largely avoid double exposure to US and UK tax, from which multiple generations could benefit.

Potential Issues with Trusts

There are various forms of US trust, US trusts can often be more rigid, requiring monies only to be distributed at certain ages, or otherwise assets might flow through a ‘waterfall’ of trusts upon the occurrence of various life events.

For UK tax purposes, UK individuals inheriting via certain types of US trusts may be problematic. One such example is with US living trusts. If an individual inherits assets via a living trust, then the precise wording of that trust is critical to whether the individual pays significant UK tax on their inheritance.

It is possible for living trusts to be characterised as bare trusts for UK purposes, which can avoid some of these issues. However, if that treatment is not obtained, you may be exposed to a potential UK capital gains tax of charge of up to 32 percent on undistributed gains, for example.

Further Action

If you are the beneficiary of a US Trust or are about to receive an inheritance, I would advise that a review of the current structure and planning is carried out.


April 25, 2022
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HMRC has released a long-anticipated update to the Crypto assets Manual on the tax treatment of “Decentralised Finance (DeFi)” – which has been an increasingly popular crypto investment space. The update seeks to clarify the UK tax treatment of certain DeFi arrangements for the first time – it should be noted that HMRC is among the first global tax authority to attempt this – and anyone invested in or borrowing with DeFi should take note.

HMRC have stated that any periodic returns from staking or lending in DeFi arrangements will not be treated as interest, despite the commercial similarity of these arrangements to a traditional loan in conventional currency.

The new HMRC guidance sets out a number of factors to consider – while acknowledging that DeFi is a constantly evolving area.

To avoid any unexpected or unwelcome tax consequences, investors and participants in the DeFi space should familiarise themselves with the latest update to the HMRC Crypto assets Manual – though some uncertainties remain.

Please contact our team for further information.


April 25, 2022
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Regulations confirming the extension of the deadline for registering non-taxable trusts to 1 September 2022 have been put before Parliament.

HMRC’s expanded Trust Registration Service (TRS) opened to registrations by non-taxable trusts on September 2021. Under the new rules, all UK express trusts and some non-UK trusts are required to register with HMRC. This includes non-taxable trusts, unless the trust is specifically excluded.

The regulations amend the legislation to reflect the new timescales (as the original deadline was March 2022):

  • The deadline for trustees to register non-taxable trusts is 1 September 2022.
  • For trusts that fall within the scope of the TRS after 1 September 2022, the deadline is 90 days.
  • Where the information held on the TRS changes, the trustees have 90 days from when they become aware of the change to update it.

Separately, HMRC has indicated that non-taxable trusts that were in existence on or after 6 October 2020, but which closed before 1 September 2021 (the date on which the expanded Trust Registration Service opened for registrations) will still need to register and then immediately close the trust record. HMRC has stated that it will take a proportionate approach if any such trust comes to its attention after the registration deadline on 1 September 2022.

HMRC has indicated that it will update its Trust Registration Service Manual with further guidance, which will be helpful to clarify some grey areas. In particular, at present it would seem that most UK nominee arrangements will need to be individually registered under the TRS, and it is to be hoped that HMRC will clarify the position.

Companies operating employee benefit trusts (EBTs), employee ownership trusts (EOTs) and other trust or nominee arrangements involving employees should consider any trust arrangements in existence on or after 6 October 2020, and (assuming that an exclusion does not apply) ensure that the trustees register them by 1 September 2022.

Please contact our team for further information.


April 25, 2022
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In response to Russia’s recent actions in Ukraine, the UK government has brought forward the implementation of the Economic Crime (Transparency and Enforcement) Bill, also known as the “Bill”.

One of the main aspects of the “Bill” is the introduction of a public register of beneficial ownership of UK property held non-UK companies and similar entities.

Who needs to be aware of the “Bill”?

  • Non-UK companies that own UK real property and their shareholders and officers;
  • Non-UK corporate trustees holding UK real property directly or indirectly;
  • Settlors, protectors and beneficiaries of non-UK trusts that hold UK real property directly or indirectly;
  • Foundations that hold UK real property and their founds, board members and beneficiaries
  • Non-UK partnerships that hold UK real property

Who are regarded as the “beneficial owners” of an overseas entity?

“Beneficial owners” are individuals, governments and public authorities or other legal entities that meet one or more of the following conditions:

  1. Ownership of shares
  2. Voting rights
  3. Right to appoint or remove directors
  4. Significant influence or control

If you are a beneficial owner of company which is not up to date, it would be advisable to review your circumstances


February 16, 2022
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Deemed Domicile and End-of-Year Tax Planning
2021/22
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As we are fast approaching the 5 April 2022 fiscal year end, now is a good time to consider your circumstances for general year-end tax planning. Particularly of note are certain milestones for non-UK domiciled individuals.

In addition, we have included various other items that you may wish to consider as part of your tax optimisation strategy.

Note that some of these topics are complex, the purpose of this content is to provide a background of the relevant topics and to prompt discussions where required.

 

US persons: Please note a US person you must consider the US tax position for each of the below items to ensure that it is effective for UK and US tax purposes. Most of the ideas detailed below may be appropriate for a US person under the right circumstances.


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

Non-UK domiciled individuals may elect to be taxed in the UK on the remittance basis – this protects foreign income against UK income and capital gains tax to the extent that this remains offshore and is not brought to the UK.

For the first seven years of UK residence there is no charge for the use of the remittance basis, however after this a fee of £30,000 is levied. When you have been resident for twelve of the previous fourteen years this fee is then increased to £60,000 and when you are UK resident for the last fifteen out of twenty years you are no longer able to claim the remittance basis.

Once you have been resident in the UK for the previous fifteen out of twenty years you are considered deemed domiciled in the UK for income tax, capital gains tax and inheritance tax. It is therefore important to consider any planning that can be beneficial. Note that part 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 2016 (the 2015/16 tax year),“A” will have been UK resident for 7 out of the last 9 years as of 06 April 2022 and will need to pay the £30k remittance basis charge in order to claim the remittance basis for the tax year 2022/23.

Example 2 – Resident 12 out of the last 14 years

“B” arrived in the UK in the tax year ended 5 April 2011 (the 2010/11 tax year),“B” will have been UK resident for 12 out of the last 14 years as of 06 April 2022 and will need to pay the £60k remittance basis charge in order to claim the remittance basis for the tax year 2022/23.

Actions for example 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 2008 (the 2007/08 tax year), “C” will have been UK resident for 15 out of the last 20 years as of April 6 2022 and will become deemed domiciled for Income, Capital gains and Inheritance tax in the UK for the 2022/23 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

• Excluded property trusts can provide effective tax planning for individuals approaching deemed domicile status.

• This planning involves settling an offshore trust to hold non-UK assets which will shelter from inheritance tax when deemed domicile status comes into effect.

• An Excluded Property Trust can also provide shelter from UK income tax and capital gains tax.

• Trusts are not always the best approach, but they should be considered in conjunction with tax efficiency planning.

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 one.


Business Investment relief

Non-UK Domiciled individuals need to take care when remitting overseas funds to the UK. Business investment relief allows individuals to make a non-taxable remittance to the UK for the purpose of making a qualifying investment in a company.

• 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. There are various other qualifying conditions, we can discuss this with you if this is of interest.


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.

• You are entitled to pay in up to £40,000 tax free per year, but this is tapered once your income exceeds £240,000 to a minimum of £4,000 allowance when your income exceeds £312,000.

• 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.

• You should also keep an eye on your pension lifetime allowance (£1,073,100) and understand the consequences of your pension exceeding this amount.

• Speak to us about your pension contributions, so your position can be reviewed and optimised.


Non-UK mutual funds and other offshore funds

• If you are approaching 7 years or 15 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.

• 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 a US mutual fund (non-reporting fund for UK purposes) may be liable to income tax(45%) on such income gains, as well as the fact that other losses are not 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.

• Please speak to us if you want to make sure your investments are working for you in the most tax efficient way.


Inheritance Tax

• UK Inheritance Tax (IHT) is assessed on the estate of a deceased individual.

• Domicile status can have a significant impact on the exposure to Inheritance Tax.

• 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.

• Please let us know if you would like a review of your affairs for Inheritance Tax planning.


Family Investment Company (FIC)

• A family investment company (FIC) is a private limited company which is used as a long term investment vehicle.

• Can provide an effective way to shelter income and assets from higher rates of taxation and Inheritance Tax.

• 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.

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.


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.

Table

I would advise that the above issues are considered carefully and where appropriate care and particlular thought is given to milestones that will pass, after which there is no ability to rectify the position. Additionally, ensuring the strategies are appropriate for both UK and US tax(where appropriate) purposes can be complex, it is likley to require professional advice from an adviser who understands the interaction between UK and US tax. Nonetheless, it is impertive that some of the above matters are given due consideration.

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

 

Frontier Fiscal Services Limited

 

 

 


January 19, 2022
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The IRS, previously in 2019, implemented procedures for specific US persons who have either renounced or intend to renounce their US citizenship in; and plan to be compliant with their US tax reporting obligations.

These procedures allow the former citizen to avoid being taxed as a “covered expatriate” under section 877A of the U.S. Internal Revenue Code (IRC).

A point to be noted is that the relief procedures for former citizens only allow a taxpayer to come back into US tax compliance without having to pay any tax owed providing they meet the following criteria and specifications:

  • The return will not have a penalty for not filing previous years (wilfully)
  • For people with a CLN (Certificate of Loss of Nationality)
  • Social Security Number / TIN not required
  • Exempt from paying tax (if under $ 25,000)

There may be possibility that if the above conditions are not met, the former citizen will be unable to enter the streamlined procedure and therefore the tax returns will be processed as normal; unfortunately, with the risk of fines and interest being applied.

If you have any further questions, please contact a member of our team.


January 19, 2022
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The IRS has released annual inflation adjustments for 2022 and these include the increase of the estate, gift and generation-skipping transfer tax as follows:

  • Increase to $12.06 million federal estate tax exemption from $11.7 million
  • The annual gift tax exclusion amount increases to $16,000 for gifts made by an individual ($32,000 if made by a married couple)
  • The gift tax annual exclusion amount for gifts to a non-citizen spouse will increase to $164,000

The applicable exclusion amounts currently remain scheduled to expire on December 31, 2025, which would result in a reduction in the exclusion amounts to $5 million (adjusted for inflation). However, new laws could always be passed that could adjust these exclusion amounts sooner.


January 19, 2022
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Owners of second homes in England who claim to be renting out their properties as holiday lets, although generally the homes are left empty, will no longer be able to access certain tax reliefs, the UK Government has announced.

Under existing rules, owners of second homes in England are exempt from council tax and can access small business rates relief if they declare they intend to let the property out to holidaymakers. However, the Government has noted concerns that many second homeowners are claiming these tax reliefs while leaving their second homes empty.

Following a public consultation, the Government has now announced its intention to proceed with new rules, which are intended at ensuring property owners pay council tax on their second homes if they are not genuine holiday lets.