As you may already be aware, offshore entities which own UK property needed to register on the Register of Overseas Entities (“ROE”) before the deadline on January 31^st, 2023. HMRC will use the information submitted to investigate any arrangements which they suspect have failed to comply with their UK tax obligations.

However – taxpayers still have time to submit a disclosure should they feel that they have not paid the correct amount of tax in respect to a UK property; HMRC has allowed taxpayers until February 28^th, 2023 to inform them that a disclosure will be submitted which may reduce any penalties charged.

The penalty regime for not notifying HMRC of taxable offshore income, assets or activities could potentially be severe and where unpaid tax exceeds £25,000, imprisonment of up to 51 weeks and an unlimited fine may be applicable, irrespectively of whether tax evasion was intentional.

The State of Massachusetts have recently approved a 4% tax on annual income above $1 million, on top of the State’s current 5% flat income tax rate. The additional tax has become effective from January 1, 2023. Although this tax will only apply to around 0.6% of Massachusetts households, it is estimated that the levy will bring in roughly 1.3 billion in revenue during 2023. The aim is to use the additional tax to fund public education, roads, bridges, and public transport.

Since the announcement, many high earners in Massachusetts have already put a number of plans in place such as accelerating their income into 2022 if at all possible. This would include accelerating receipt of deferred compensation or selling as asset before the new levy comes into effect. Some have opted to spread their income over a number of years to stay below the $1 million threshold.

Some are even considering moving. As a final option higher earners may choose to leave Massachusetts and opt to live and work in a lower tax State. Although a big step, this may be the only option for some and worthwhile if the levy means a huge tax increase for them.

California State recently rejected a similar proposal of a 1.75% on annual income of more than $2 million, where the funds were earmarked for zero emission vehicle subsidies. California already has a much higher rate of tax of 13.3% for those earning over $1 million. So, has a State trend begun? Experts do not believe there is a broader trend at State level of a millionaire tax rate, as most States have actually reduced their tax rates for 2023. However, this is something to keep an eye on.

The findings of the Obus v. New York State Tax Appeals Tribunal proves beneficial to those taxpayers who do not reside in New York, however, owns a vacation home in this state.

Under New York law, a taxpayer is deemed ‘New York resident’ in two ways:

1. Domicile Test: The individual is domiciled in New York and views New York as their permanent home.
2. Statutory Resident Test: The individual is domiciled outside of New York, however:

• (a) maintains a “permanent place of abode” in New York *
• (b) spends more than 183 days of the year in New York.

*Note – New York previously implemented that a permanent place of abode is a residence that is suitable for year-round use; including rentals and vacation homes.

Application to the Obus Case

Key notes:

1. Obus was a domiciliary of New Jersey and commuted daily to New York City for work and in 2011, Obus and his wife purchased a vacation home in New York
2. Obus used the home for 2-3 weeks per year for personal activities.
3. The home also included an attached apartment, which was occupied by a tenant.

Upon filing a Non-Resident New York State Tax Return and stated that they did not maintain a permanent place of abode in New York; they were audited, and it was determined by the New York Division of Taxation and Finance that the vacation home was in fact a permanent place of abode as they had a right to reside there.

Obus appealed this decision based on the below facts:

1. He used the home for only 2 – 3 weeks per year.
2. The home was not bought to commute to and from his workplace as the location of the New York home was more than 4 hours commute away.
3. Obus did not keep personal possessions in the home and therefore was not a residential interest.
4. He would inform his tenant when he would be staying at the New York home.

With the Obus ruling, a vacation home in New York no longer automatically qualifies as a permanent place of abode for purposes of the statutory resident test.

Instead, this will be determined as to whether a taxpayer has a residential interest in the vacation home.

As the new tax season is upon us, it is a good time to go over the inflation adjustments that the IRS had announced for the 2023 tax year. As a result of the high level of inflation that many taxpayers have seen throughout 2022, several key provisions such as income tax thresholds will increase by roughly 7%. Below are some of the key adjustments that may affect you.

Although the marginal tax rates remain unchanged the federal tax brackets have all increased for 2023. We will see the top tax bracket (37% tax rate) increase to $578,126 for single filers and $693,751 for those who are married filing jointly.

The standard deduction for all has also increased. Single filers will receive a standard deduction of $13,850, up by $900, while married filing jointly standard deduction will be $27,700, up by $1,800.

The Foreign Earned Income exclusion for 2023 will be $120,000, up from $112,000.

There has also been changes on how much you can contribute to your retirement plan. You can contribute up to $22,500 into your 401k plan. The annual contribution limit for IRA’s has also increased to $6,500 ($7,500 if you are aged 50 and over).

We will also see an increase in the Estate Tax lifetime exclusion from $12,060,000 to $12,920,000. The annual gift exclusion has also increased from $16,000 to $17,000 meaning a married couple can now make a gift to up $34,000 without using their Estate tax exclusion.

We will be happy to answer any question you have on the 2023 changes so feel free to get in touch.

From April 2023, companies will be able to raise up to £250,000 of Seed Enterprise Investment Scheme (SEIS) investment, a two-thirds increase. To enable more companies to use SEIS, the gross asset limit will be increased to £350,000 and the age limit from two to three years. To support these increases, the annual investor limit will be doubled to £200,000.

The government has announced that the capital gains tax annual exempt amount will be reduced from £12,300 to £6,000 from April 2023 and to £3,000 from April 2024.

In September 2021, the government published its proposals for new investment in health and social care in England. To fund the investment the government introduced a UK-wide 1.25% Health and Social Care Levy based on the National Insurance contributions (NICs) system but ringfenced for health and social care. The Health and Social Care Levy Act provided for a temporary 1.25% increase to both the main and additional rates of Class 1, Class 1A, Class 1B and Class 4 NICs for 2022/23. From April 2023 onwards, the NIC rates were intended to revert to 2021/22 levels and be replaced by a new 1.25% Health and Social Care Levy.

The government has confirmed that, from April 2023, the rates of taxation on dividend income will remain as follows:

• the dividend ordinary rate – 8.75%
• the dividend upper rate – 33.75%
• the dividend additional rate – 39.35%

The government will reduce the Dividend Allowance from £2,000 to £1,000 from April 2023 and to £500 from April 2024.

The government had previously announced that there would be a cut in the basic rate of income tax, from 20% to 19%, from April 2024. However, it will remain at 20% indefinitely until the economic conditions allow and a change is affordable. The government also announced a plan to abolish the 45% additional rate of income tax from April 2023, which was later scrapped. From 6 April 2023, the point at which individuals pay the additional rate will be lowered from £150,000 to £125,140.

Victoria Atkins, Financial Secretary to the Treasury announced this week that plans to introduce Making Tax Digital (MTD) for Income Tax Self-Assessment (ITSA) will be pushed back to April 2026, a two-year delay on the planned implementation of April 2024.

MTD ITSA will now be mandatory for businesses from April 2026. However, this will only apply to those businesses, self-employed individuals and landlords who have income above £50,000. Businesses with income over £30,000 will be mandated to comply with MTD ITSA from April 2027.

The government has also announced a review into the needs of smaller businesses, and particularly those under the £30,000 income threshold. It will inform the approach for any further roll out of MTD for ITSA after April 2027.

MTD for ITSA will not be extended to general partnerships in 2025 as previously announced.

Where a taxpayer falls into the MTD ITSA regime, they will need to keep digital records and submit quarterly reports to HMRC as well as complete a year-end reconciliation and update process which broadly equates to the current self-assessment tax return filing.