As the US tax year-end approaches on 31 December 2018, Americans living in the UK need to ensure their financial affairs are in order.
What is important to remember is that tax reforms came into effect in 2018 and several rates and allowances have changed.
For Americans living in the UK and their advisers, financial planning and wealth management are complex.
They affect everything from income and capital gains, to pension saving and gifting. UK advisers of US clients must take into account different regulations, tax calendars and currencies.
Here are five things that advisers of Americans in the UK need to consider in the run-up to the end of the US tax year.
1. Make sure to manage US and UK investment accounts and capital gains
The US and UK have different ways of taxing capital gains, which has the potential to catch people by surprise if they are not prepared.
In the US, the Internal Revenue Service divides capital gains into short-term and long-term gains, and applies different tax rates to each. A gain on an asset that was held for less than one year is considered short-term, and is taxed as ordinary income.
Long-term gains arise on assets held for more than a year and are taxed at up to 20 per cent dependent on annual income.
Crucially, short-term gains will be taxed at a higher rate, especially for higher earners, whose federal income tax rate can be up to 37 per cent.
An important point to consider for people who have investment assets in both the US and UK is that efforts to reduce a tax liability in one jurisdiction could lead to an unwanted tax bill in the other.
For example, a client’s US investment manager is unlikely to manage a US-based investment portfolio from a UK perspective, such as considering whether there are any sterling-based gains or losses at the end of the UK tax year.
Instead, the US investment manager will seek to offset gains with pre-existing losses for the end of the US tax year on 31 December and in US dollars.
Therefore, despite efforts to reduce US tax liabilities, there is the possibility that tax may be due in the UK because of differences in timing, currency movements and the way capital gains are taxed.
The same will of course be true for a UK investment manager for any US tax filings.
A UK portfolio will not be managed to minimise dollar-based gains and losses at US tax year end, which can therefore incur capital gains taxes in a client’s US tax return. The worst-case scenario is that a UK-based investor, for example, might be taxed in the UK as a result of US tax year end planning that has taken place in their US portfolio.
Another important detail is the way phased investments are treated. If a client makes several investments in a single stock over time, in the US those investments are treated as separate lots for
capital gains tax purposes, on a “last in, first out” basis.