In a recent tax case it was found that foreign tax credits did not apply against the net investment income tax (NIIT). In summary, the structure of the Internal Revenue Code made the credit inapplicable to the NIIT, and tax treaties did not override that fact.

Each year, the IRS produces a list of “Dirty Dozen Tax Scams” to warn the public of the worst ways taxpayers are being scammed. The IRS has placed certain Malta-based pension plan arrangements on this list. The IRS warns that it is evaluating the validity of such arrangements and may challenge the tax treatment of Maltese pension plan contributions and distributions. IR-2021-144 (July 1, 2021).

The types of pension arrangements that have attracted IRS attention involve a U.S. citizen or resident who contributes appreciated assets to a Maltese pension plan, sells the assets within the plan, and receives a distribution of proceeds relating to the asset sales from the plan. Relying on an interpretation of the U.S.-Malta Income Tax Treaty, U.S. citizens and residents, and their advisors, take the position that the transactions, both the realized gain and distributions, are not subject to tax.

Participants in Maltese pension plans should be aware that the IRS is scrutinising tax positions and treaty interpretations related to these plans. The appearance of an arrangement on the “Dirty Dozen” leads to increased IRS activity, and participants in Maltese pension plans should prepare to defend their tax reporting positions.

Although, the elimination of the $10,000 cap on individual taxpayers’ ability to deduct state and local taxes was not mentioned in the proposal; there is talk of this being added to the final version of tax changes before implementation.

If you have any questions, please feel free to contact our team.

On September 13, 2021, proposed tax changes were released as part of the reconciliation bill by the House Ways and Means Committee – this reconciliation bill is familiarly known as ‘Build America Back Better’.

The proposed tax changes apply for both individuals and business which include: –

A recent judicial review case (Murphy v HMRC [2021] EWHC 1914 Admin, 13 July 2021) confirmed HMRC’s view that UK resident beneficiaries who receive discretionary income payments from offshore trusts can only claim relief for income tax paid by the trustees on income that arose in the 6 years before the end of the tax year in which the payment to the beneficiary was made.

The decision turned on the interpretation of an extra statutory concession (ESC18) which concerns the income tax credit available on discretionary payments out of both UK and non-UK resident trusts. The taxpayer had argued that the concession did not impose a time limit on UK residents but the decision confirms that payments to a UK resident from a non-UK trust are subject to the same 6 year time limit for claiming credit for income tax already paid, as applies to non-UK resident beneficiaries of a UK trust. The decision also shines a spotlight on the authority of HMRC concessions, emphasising that they can only be relied upon if they are absolutely clear in scope.

The UK’s implementation of the EU Fifth Anti-Money Laundering Directive requires the majority of Trusts to be registered with HMRC by September 2022. The Trust Registration Service (TRS) became available on 1 September 2021, for non-taxable trusts to register with HMRC, as opposed to previously when just taxable Trusts had to be registered. This includes existing Trusts (many of which may have run for decades with little or no “professional” interference) and any future Trusts, which must now be registered within 90 days.

The new requirement catches many more types of Trusts; declaration of trusts where parents hold property for their children, and common “protection” trusts in Wills whereby a spouse has a life interest in a property, or a nil rate band trust is set up. It will be the duty of the Trustees to register these Trusts, however, everyone should be encouraged to question their own circumstances and whether there is anything that may be caught by these requirements.

HMRC have clarified the deadline for trustees to register non-taxable trusts, including all UK express trusts and some non-UK trusts holding UK property, due to delays with the service. Please contact us if you require further assistance.

The new deadlines are:

• Non-taxable trusts in existence on or after 6 October 2020: by 1 September 2022.
• Non-taxable trusts created after 1 September 2022: within 90 days.
• Trusts created within 90 days of 1 September 2022 have 90 days to register.
• Changes to trust details and/or circumstances: within 90 days of the change.

Certain specific trusts are excluded from registering as are bare trusts and deeds of trust between spouses in connection with Joint property ownership, as these are not classed as express trusts for these purposes.

Family investment companies (FIC) have been increasingly used to hold family assets and to pass wealth to the next generations. Well-structured FIC’s allow adult children to become involved with the management of assets without taking the complete control of the FIC’s. This can have both short-term tax advantages as well as long term potential inheritance tax advantages.

In 2019 HMRC set up a unit to investigate potential loss of inheritance tax. This unit looked at FICs and carried out a quantitative and qualitative review into any tax risks associated with such entities, with a focus on inheritance tax implications.

The investigative unit has been closed down after failing to find any correlation between the use of FIC’s and non-compliant behaviour. They, however, have not confirmed that they have no intention of introducing anti-avoidance legislations in the future. FIC’s, therefore, remain an active option however the prospects of future changes cannot be ruled out.

According to the Taxpayer Advocate Service, the Internal Revenue Service still had more than 35 million tax returns to process at the end of the 2020 filing season. About 23 million of those returns were filed by individuals who may be waiting on refunds or stimulus checks, according to the report that was released recently. The difficulties of working during the pandemic, combined with last-minute tax changes made by Congress aimed at providing relief for struggling Americans, created a challenging tax filing season for the IRS.

About 5 million returns are under review because there were discrepancies in how much the filers were claiming for their stimulus payments. Taxpayers who did not receive their stimulus checks, or are owed more than they originally received because they lost their jobs during the pandemic, are allowed to claim the difference on their tax returns. But when the amount they claim doesn’t match IRS records, the agency has to conduct manual reviews. In response to the report, the IRS has said it has made improvements to streamline hiring and continues to improve telephone services for taxpayers.

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.