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.
By contrast, in the UK, the holdings are aggregated and taxed on the basis of an average price.
Tax-efficient investment management for cross border clients is a complex business that needs considerable expertise and attention to detail.
2. Careful planning of foreign tax credits and pension contributions is vital
US citizens living in the UK typically pay a higher rate of income tax to HM Revenue & Customs than they would have to the IRS.
The top income tax rate in the UK is 45 per cent, compared with 37 per cent in the US.
However, it is possible to receive foreign tax credits on the excess UK tax paid compared with the US.
These can then be used to allow pension savings and other UK efficient investments.
The key when planning how this can be used to a client’s advantage, is to think about the differing tax years in the US and UK. The US tax year is aligned to the calendar year and the UK tax year is
aligned to the fiscal year, ending on 5 April.
This can cause problems, particularly if a UK tax bill is paid after the end of the US tax year.
However, by taking this into consideration when planning clients’ portfolios, they could pay a UK tax bill within the US tax year (that is, before 31 December instead of by the UK deadline of 31 January).
In doing so, a foreign tax credit will be provided for the corresponding tax year.
By paying any UK tax liability within the US tax year, tax credits can be used there and then in relation to US income tax due, as opposed to having to pay the full amount of US tax and reclaiming
later because the UK payment did not fall in the US tax year in question.
Timing is everything. It is vital to make sure this is accounted for. First, advisers need to ensure there is enough cash to cover any tax payment, available in time without triggering further tax events.
