Whole-life tax planning is always the best method of managing global tax exposures. With significant breadth and depth of experience, our tax advisers here at Citrine International work closely with our clients to plan their tax affairs through every stage of life, whatever the complexity.
Citrine International clients are spread throughout the world and include high net worth individuals working for Fortune 500 companies and financial institutions as well as self-employed individuals in varying capacities. A bespoke service for whole-life tax planning, ensures we can anticipate and target tax issues proactively for all our clients.
We seek to provide a bespoke tax compliance solution specific to a client’s needs and circumstances. Our team is experienced in both UK and US tax compliance and has is familiar with analysing the domestic laws of both jurisdictions as well as the UK/US double taxation convention. Our processes and communications are designed to make cross-border tax compliance as clear, transparent and manageable as possible.
These services include:
- Completion of annual tax returns
- Managing risk through accurate and timely disclosures
- Payment deadline reminders
- Direct communication with HMRC and/or the IRS
- Meetings to discuss changes in circumstances
- Flexible methods of gathering information
Compliance is not just a form-filling exercise for us. It is an opportunity to engage with the mechanics of our clients’ tax affairs and to identify technical issues in the context of their overall situation. In other words, while preparing the tax forms we look for opportunities for more tax effective outcomes.
Major events in life can have significant associated tax consequences. Such events may include marriage, the birth of children, education, retirement, infirmity and ultimately death. The tax impacts of these are far more complicated when more than one taxing authority is involved.
We can help our clients to navigate these key life events from a UK and US tax perspective, not just as discrete events, but within the context of a ‘whole life’ plan. After all, decisions taken today, can have ramifications far into the future.
For example, the priorities of a young, unmarried adult, starting out in business are unlikely to be the same as those of someone who is older, married, deriving income from a trust, with a family to support.
They key to whole-life tax planning is to be as pro-active as possible. This will often involve the need for us to liaise with other professionals to ensure that the tax strategy fits in with (often) more important investment and life goals. There are few situations where tax drives an overall strategy and, as far as possible, we aim not to let the tail wag the proverbial dog.
Our approach is always to help the client establish projections as to what the future may hold and revisit these projections to consider the tax impacts as often as is reasonably required. Key triggers for updating a global tax strategy would include changes in the client’s personal circumstances (whether envisaged or unforeseen), major local / world events and changes in tax laws.
Whole-life planning may require considering tax impacts beyond those concerning the client himself. For example:
- the decision by a US citizen, resident in the United Kingdom to set up a trust for the benefit of his children will have UK and US tax implications for both him and the children. Trusts are popular devices for managing and protecting wealth. Trust law in the United States and the United Kingdom tends to be weighty and complex, particularly where there is a foreign element.
- business structures may need to be put in place and wound down during an individual’s life time. Setting up a family company or investing in a corporate entity can be managed proactively such that the UK and US tax treatments are brought into alignment and optimized from implementation through to exit.
- savings may need to be considered in the context of longer term goals, such as the provision of education for children. It will be important to analyse whether certain tax efficient products from a local perspective (e.g. section 529 plans in the United States or ISAs in the United Kingdom) are actually tax efficient globally.
- retirement tax planning can be more complex than one might imagine. To establish a truly efficient tax strategy for retirement requires an understanding of where the client is likely to be resident during his lifetime and upon retirement. International tax planning for pensions is geared to the relevant double taxation convention. For example, if a client ends up retiring in a country with no convention or where the convention in question does not cover the client’s retirement plan, adverse tax outcomes are likely. Such planning would necessarily evolve as a function of the client’s movements around the globe.
Whatever the stage of life, we are here to help make sense of the UK and US tax issues.
Domestic tax rules concerning pensions can be highly complex. The cross-border taxation of retirement schemes raises the level of complexity significantly. The key to understanding how pensions will be treated often lies in the conditions found in double taxation conventions. This is particularly the case with the UK / US convention which contains provisions covering pension distributions, contributions and growth in UK and US pensions held by residents of either or both jurisdictions.
The initial problem lies in understanding whether a pension in one territory is even regarded as a pension by the other territory under the terms of a double taxation convention. While the UK / US convention covers many situations, the terms for obtaining equivalence of tax treatment in both territories often do not apply. This may or may not be a problem depending on the client’s specific circumstances (e.g. where the client has sufficient ‘excess foreign tax credits’ on a US tax return the lack of treaty protection for pension contributions may be purely academic).
We analyse our clients’ existing and envisaged pension provision to determine whether they would be tax efficient based on their future expected tax residency. This can be particularly tricky where an individual decides to move to a different country in future.
US regulations currently require additional reporting with respect to certain foreign pension schemes. These can include the annual filing of forms FinCEN 114 (Report of Foreign Bank and Financial Accounts), 3520 (Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts), 3520-A (Annual Information Return of Foreign Trust With a US Owner) and 8938 (Statement of Specified Foreign Financial Assets). The failure to file these forms can result in significant penalties. We can help with the preparation of these forms.
We work with our clients, their pension providers and financial planners to ensure that pension provision is considered in a tax efficient manner with short, medium and long-term strategies in mind.
It is crucial that individuals review their investments to ensure that there are no unexpected adverse tax implications when they move between countries.
A health check as to whether locally tax efficient investments are globally tax efficient needs to be carried out. US taxpayers living in the United Kingdom or UK residents moving to the United States may be invested in ‘Individual Saving Accounts’ (ISAs) that are seen as tax efficient investment structures from a UK tax perspective. ISAs are not tax efficient from a US perspective and the income generated therein would be subject to US tax for a US taxpayer.
If a US taxpayer is invested in so-called ‘PFICs’ there can be significant adverse tax consequences. Non-US collective investments (such as UK unit trusts or Luxembourg SICAVs) are usually PFICs. The US would seek to tax some or all of the income from these investments at punitive tax rates with an interest charge based on the length of time the investments have been held. Additionally, foreign tax credit relief may not be available leading to double taxation.
Conversely, UK tax residents invested in ‘offshore funds’ that do not have HMRC reporting status are subject to a special regime that imposes higher UK tax rates. We help in avoiding such tax pitfalls so the client can maintain the integrity of their portfolio to the maximum extent possible. Our client’s investment portfolios can be diverse. We have experience in helping our clients manage their portfolios from a tax perspective.
We work with our clients’ investment advisers to consider the global tax efficiency of:
- investments that are specifically geared to tax efficiency in one jurisdiction only
- complex investment structures (e.g. cross-border private equity investments)
- bonds (e.g. offshore investment bonds)
- life insurance policies
- collective investments (with a view to avoiding PFICs, if the client ins a US taxpayer and non-reporting offshore funds, if the client is a UK arising basis taxpayer)
- simple investments (e.g. US state muni bond investments for UK resident taxpayers (on the remittance basis of taxation) who are also US taxpayers)
Inheritance & Gifts
We help our clients with assets in the United States and the United Kingdom to establish a favourable tax strategy with regards to US estate / gift taxes and UK inheritance taxes.
Where a marriage or civil partnership includes a US citizen and a non-US citizen there can be significant tax issues without appropriate planning. This is also the case where one of the individuals is domiciled (or deemed domiciled) in the United Kingdom and the other is not.
The US uniform transfer tax regime, provides for a 40% rate of tax on taxable estates and taxable lifetime gifts. The tax only applies where the lifetime gifts and estate of a US citizen or domiciliary exceed a lifetime exclusion amount (which is 11.58 million USD for 2020). Gifts between spouses usually benefit from an unlimited marital deduction. This is not the case where gifts are made by a US citizen spouse to a non-US citizen spouse.
An individual who is non-UK domiciled and who has not become deemed domiciled in the United Kingdom is subject to UK inheritance tax on their UK assets only. An individual who is domiciled (or deemed domiciled) in the United Kingdom is subject to inheritance tax on their worldwide assets.
UK inheritance tax is generally levied at a rate of 40%. Most lifetime gifts are not subject to UK inheritance tax where the donor survives seven years from the date of the gifts. Estates are taxable to the extent they (and any taxable lifetime gifts) exceed the nil rate band of 325,000 GBP, currently. There is an additional inheritance tax relief where a main home is concerned. For 2020/2021 the main residence nil-rate band allows for an additional 175,000 GBP to avoid inheritance tax where a main home is passed to a direct descendant.
We can assist clients in developing a coherent global transfer tax strategy which may include:
- Making lifetime gifts to reduce the client’s taxable estate.
- Review of existing wills, trusts and other documents (e.g. lasting powers of attorney) from a tax perspective and engaging with an international lawyer where revised or new documents are required. This is important where, for example, an individual appoints a US citizen to be the executor and trustee of their estate. Without an appropriate general limitation on the powers of the US citizen the entire value of the will trust could fall within the US trustee’s estate for US estate tax purposes.
- Considering the use of a qualified domestic trust (QDOT) to prevent US estate tax being due until the surviving non-US citizen spouse takes out the trust assets or dies.
- Analysing whether an excluded property trust would be appropriate for a UK non-domiciled (and non-deemed domiciled) individual to avoid UK inheritance tax on offshore assets.
- Considering whether a life insurance policy would help to mitigate against future taxes due on death. To be tax effective this may require the use of an irrevocable trust to hold the life insurance policy.
Immigration / Emigration
For clients choosing to move from the United Kingdom to the United States or vice versa it is essential to take proper tax advice in advance.
For an individual who wishes to move to the United Kingdom from the United States such tax advice would involve establishing when UK tax residency is likely to commence and whether it is possible to benefit from the UK’s favourable tax regime for non-UK domiciliaries. These so-called ‘non-doms’ may benefit by using the remittance basis to avoid UK tax on income and gains arising and kept offshore.
We can assist with a comprehensive pre-immigration strategy to ensure tax optimisation. This would include analysing our client’s residency and domicile status as well as specific items such as:
- structuring offshore accounts for effective remittance basis planning
- to separate income from (clean) capital;
- ideally prior to the individual becoming UK tax resident.
- strategising for movements of funds to the United Kingdom during periods of non-residency;
- analysing the client’s investment portfolio to
- identify whether ‘toxic’ non-UK investments need to be restructured. These include ‘offshore funds’ that do not have HMRC reporting status;
- avoid UK sources of income and gains;
- realise foreign income while non-resident;
- realise foreign gains and non-UK land / property gains when non-resident and postpone losses until UK resident.
- analysing non-UK trusts for their UK tax treatment
- particularly to prevent accidental importing of a foreign trust into the United Kingdom;
- special issues can arise where there is a mismatch in the UK and US tax treatment of a trust’ for example where the United Kingdom considers a trust to be a taxable entity in its own right but the United States considers it to be a grantor trust (in which case the owner of the trust would be taxable on the trust’s income).
- reviewing the client’s involvement in offshore corporate structures and partnerships
We also assist individuals who are moving from the United Kingdom to the United States to optimise their global tax positions. With cross-border moves there are both pitfalls and opportunities to be carefully considered. To take full advantage of tax planning it is very important that advice is taken as early as possible before the move.
Such advice may include the following:
- Tax residency
- determining an optimal US tax residency start date;
- managing the start of state tax residency which may differ from that for US purposes;
- co-ordinating the commencement of US and state tax residency with UK residence termination;
- advising on how to avoid re-triggering UK tax residency whilst in the United States;
- considering the overall question of tax residency in the context of the UK / US double taxation convention.
- Timing of income
- managing the timing of significant transactions and determining whether it is possible to accelerate income recognition prior to becoming US tax resident without adverse UK tax consequences.
- Choice of US state
- where possible and practical, choosing which state in which the individual intends to reside. Income tax rates can vary significantly between states. Some states have community property laws such that married persons are considered to own their property and income jointly, regardless of title.
- Entity classification elections
- considering elections to trigger gain for US tax purposes prior to becoming US tax resident without realising gains in the United Kingdom.
- US anti-deferral regimes
- reviewing non-US investments to ensure that ‘toxic’ investments are restructured (e.g. those which could result in adverse US taxation and onerous reporting under the PFIC and CFC anti-deferral regimes).
- Non-US pensions
- analysing non-US pension holdings to establish whether treaty protections will apply to contributions and the plan’s earnings / accretions;
- considering the impact of US pension basis rules for a non-resident alien becoming US tax resident.
- analysing trusts created for the client’s benefit for their US income tax treatment and whether they are transparent for US income tax purposes.
- reviewing foreign trusts to determine whether an immigrating client would be subject to US income tax on the foreign trust’s income as a result of the ‘five year’ rule.
- US estate / gift taxes
- considering whether an accelerated gifting strategy is appropriate, prior to moving to the United States in order to avoid gift tax limits, reduce the client’s exposure to US estate tax and remove ‘toxic’ assets from the client’s portfolio;
- analysis of facts and circumstances to determine domicile status for US gift and estate tax purposes. Guiding the client, where desirable, to maintain his US connections at a minimum to avoid US domicile status.
- US filing obligations
- guiding the client as to his reporting obligations after becoming resident. These may extend beyond the need to file an annual tax return. Additional forms such as an ‘FBAR’ to report non-US financial accounts, form 8938 to report foreign financial assets, form 5471 to report interests in certain foreign corporations, etc. may be required. The failure to file these reporting forms can carry significant statutory penalties.
- We have a deep understanding of domestic US and UK tax law and their interaction with the UK / US double taxation convention. We can help our clients to plan to avoid unintended, negative outcomes and to optimise their global tax positions. We work collaboratively to establish a coherent tax strategy that is designed to optimize taxes, manage costs and streamline administration.
- to determine whether there is any exposure to double taxation due to a mismatch between the source country and UK tax treatment of the entity in question;
- US LLC’s and S-corporation interests can pose particular problems when held by UK residents if no planning is carried out. HMRC’s default treatment of these types of entity may not match the default (or elected) treatment of the entities by the IRS.
- considering the tax efficiency of employment arrangements including:
- whether it is preferable for the client to be on a secondment from the home country versus being a UK local hire;
- whether the ‘detached duty’ rules should also be considered where the immigrating individual is sent by their employer on secondment from their home country to the United Kingdom for up to two years. There can be significant UK tax benefits for such individuals who can claim a UK tax deduction for travel and subsistence costs relating to the UK secondment;
- whether ‘overseas workdays relief’ can apply to exempt employment income connected with non-UK workdays from UK income taxation.
- analysing non-UK pension holdings to determine whether there are any potential negative UK tax impacts. Alignment of tax treatments between the pension plan’s country of residence and the United Kingdom may be achievable through a double taxation convention. The UK / US convention covers many (but not all) situations involving the tax treatment of US pensions held by UK tax residents.
There is a strong tradition of public and private philanthropy in the United Kingdom and the United States. Where clients wish to make gifts to charity it is important to consider the tax rules of both jurisdictions and how they interrelate. While both the United Kingdom and the United States allow a tax deduction for contributions to charities the UK rules are more complex. Under US law an itemized deduction is allowed for contributions to US registered charities up to certain limits related to the level of income of the taxpayer. In the United Kingdom the taxpayer funds a 20% tax gross up on any net contribution made to a registered charity under the ‘gift aid scheme’ (i.e. the taxpayer gifts 80 GBP and an additional 20 GBP is given to charity from taxes paid by the individual). The taxpayer is then entitled to tax relief if his actual tax rate exceeds 20%.
One of the main problems is that charities that are qualified for US tax relief are unlikely to be qualified for UK tax relief (and vice versa). An analysis of the client’s global tax position is useful at this point. A UK resident, US citizen making a contribution to a UK charity may find that this contribution is globally tax efficient where he has sufficient foreign tax credits on his US tax return. The outcome being that the charitable donation tax relief reduces his UK tax whilst the foreign tax credits reduce his US tax.
Where the desired donations do not produce a globally tax efficient outcome, a dual qualified structure may need to be considered (i.e. one that is governed by both US and English law). An alternative to the potentially costly route of establishing a structure would be to use a US / UK donor advised fund (DAF) to achieve philanthropic goals. A DAF is established under an umbrella charity such that the donor can receive tax receive tax relief in both jurisdictions and recommend how funds are granted.
We can assist our clients in formulating UK / US tax favoured global philanthropic strategies.
Property & Lifestyle Investments
The decision to own property in a foreign country inevitably leads to tax considerations. A US citizen or green card holder, resident in a foreign country also needs to be aware of the cross-border tax issues that can impact them from owning property there.
Firstly, there is the issue of exchange rates. Transactional amounts, such as acquisition costs and disposal prices, need to be converted at the relevant rate of exchange at the time of the transaction. This can lead to different levels of gain and loss between territories. There is a US tax trap for the wary concerning loans and exchange rates – where a loan is redeemed at a lower USD rate than that at which it was acquired an exchange rate gain can arise. This can result in unexpected tax bills for US taxpayers paying down their foreign mortgage related loans.
There are disparities between countries and tax reliefs for main homes. The United Kingdom currently has a generous regime whereby most people do not pay UK capital gains tax on the disposal of their main homes. The US regime only allows for an exclusion of up to 250,000 USD of gain for a taxpayer filing as single.
Particular issues arise where UK residents (who are not US citizens or residents) invest in US real estate. The FIRPTA (Foreign Investment in Real Property Taxes Act) rules can apply such that the gross proceeds of sale of the US property are subject to 15% US withholding taxes. If the value of the property far exceeds the gain, this tax withholding will be excessive but cannot be avoided unless a withholding certificate is requested from, and issued by, the IRS.
UK non-residents who dispose of land or residential property in the United Kingdom are subject to a special non-resident capital gains tax regime. Generally, this can require a disclosure and payment of tax within 30 days of the conveyance of the property.
Corporate entities have been a popular mechanism for owning real estate. They can confer benefits in the form of lower corporate tax rates compared to personal income tax rates. Additionally, the corporate structure provides some legal liability protection to its shareholders. With careful planning, corporate entities can be used to mitigate inheritance / estate taxes.
There are down sides to owning property through a limited company. These include an elevated rate of Stamp Duty Land tax for properties in the United Kingdom purchased by companies and an Annual Tax on Enveloped Dwellings (ATED). The ATED is an annual tax payable by companies that own UK residential property valued at more than 500,000 GBP. On top of these, a foreign company owning UK property may fall within the anti-deferral regimes found in §13 TCGA and the ‘transfer of assets abroad’ legislation.
If a UK company owns US real estate then the FIRPTA rules (above) will need to be addressed. We can help clients consider how to structure their property ownership from a tax efficient perspective.
Our guidance can include:
- whether is tax efficient to hold real estate property through an entity or outright
- how to resolve existing structures that are inefficient for tax purposes
- consideration of how property should be held outright (e.g. as tenants in common or joint tenants under UK law)
- whether a main home election should be made for UK tax purposes – this would be applicable and possibly advantageous where the individual has more than one property
- how to plan for maximum main home relief in the territories where the owner is a taxpayer
- how to manage the US FIRPTA rules particularly for cash-flow management
- analysing how the UK non-resident capital gains tax rules apply to individuals who are not resident in the United Kingdom and own real estate property in the country