US expats in the UK should be sorting out their financial affairs as the tax year end approaches on December 31.
This year is important for taxpayers as several tax reforms have come into effect and many rates and allowances have changed.
The changes impact income tax, capital gains and pensions.
Pitfalls for expats in the UK
Here are some of the main points to consider:
Capital gains are taxed differently in the UK and USA.
In the US, capital gains are split between short term holdings – held for less than a year – and long term gains – the rest. Short term gains are taxed as ordinary income, but long term gains are taxed at 20%.
That means short term gains can be taxed at up to 37% for high earners.
Another point to watch is the different tax year ends in each country that can trigger tax liabilities in the other.
Income tax rates are higher in the UK for US expats
The top tax rate in the US is 37%, compared to 45% in the UK, but foreign tax credits on the higher tax rate in the UK can go towards tax-efficient =investments such as pensions or the Seed Enterprise Investment Scheme (SEIS) in the UK.
Be careful about making gifts.
US gifts are not recognised under UK inheritance tax rules and the annual and lifetime limits and rules vary considerably between the countries.
Review any gifts to make sure they are with no-strings attached and that US expats are aware they may pay IHT in the UK if they die within seven years of making the gift.
Look at charitable giving to make the most of tax breaks
Tax breaks are due in both countries for charitable giving and some charities are ‘dual qualifying’ or gifts to them attract tax breaks in both countries.
But many US charities are not recognised in Britain and donations do not qualify for tax relief.
Check your IRA payments
Older expats may have to take required minimum distributions from their pensions.
These RMDs can trigger higher tax bills and can be easily overlooked by expats.