Trump Change: Tax planning for US/UK individuals in a post-truth world
Chris McLemore Contact Information Chris.McLemore@butlersnow.com +44 (0) 203 300 3806 Practice Areas and Industry Teams Wealth Transfer Planning (International) Tax Estates and Trusts Experience Represents high net worth families and their advisors with respect to US federal income, estate and gift tax issues, with an emphasis on integrated US/UK estate and tax planning Advises fiduciaries of trusts with US person beneficiaries or settlors Advises on the relinquishment of US citizenship (expatriation) and relinquishment of lawful permanent residency (green card) status Advises individuals, financial institutions and trust companies regarding US federal tax compliance, including FATCA and the IRS Voluntary Tax Disclosure and Streamlined filing programs Advises individuals with respect to the US federal tax implications of divorce
Kristin Konschnik Contact Information Kristin.Konschnik@butlersnow.com +44 (0) 203 300 3809 Practice Areas and Industry Teams Tax Taxation of Businesses Tax Exempt Organizations Tax Controversy Experience Kristin advises individuals and their companies on US and international transactional tax matters, including cross-border sales and acquisitions, intellectual property structuring, hedge and private equity funds, and taxefficient US inbound and outbound business and investments. She also regularly advises on foreign tax credit and treaty planning Kristin frequently works with founders, investors and management on a range of US tax issues, including compensation matters, in private equity buyout and rollover transactions Kristin helps clients consider tax-efficient giving, including through personal philanthropic vehicles, and advises clients on creating and operating US taxexempt 'public charities' and 'private foundations' under US Section 501(c)(3).
Transfer Taxes The Basics The federal estate and gift tax exemption has doubled to $10 million, and the inflationadjusted amount will be approximately $11.2 million per person for 2018 - The federal generation skipping transfer (GST) tax exemption has also increased For 2018, the annual gift tax exclusion will be $15,000 and the annual gift tax exclusion for transfers to a non-citizen spouse will be $152,000 (subject to further changes for 2018 inflation adjusted items) The exclusion amount for non-citizens who are not domiciled in the US remains at $60,000 on US-situate property - Also consider the US/UK estate and gift tax treaty Assets transferred on death will benefit from a step-up in basis; assets transferred during lifetime by way of a gift will have a carry-over basis in the hands of the recipient The amount of a decedent s exempt amount which is not used on death is portable to a surviving spouse
Transfer Taxes The Clawback The TCJA contains a provision directing the Treasury to address any difference between the exempt amount at the time a gift is made and the exempt amount at the time of such donor s death A donor could therefore made a gift of $10 million during his lifetime which would be free from federal gift tax at the time of the transfer. However, this gift could trigger a federal estate tax charge upon the donor s death if the exempt amount has been reduced by that time (e.g., because of the sunset provisions) This is noteworthy, however, many practitioners do not expect the clawback to materialize
Transfer Taxes Planning With The Large Exemption The large exempt amount will result in additional scrutiny on local taxing regimes (i.e., state estate tax and tax in jurisdiction of residence/domicile or where assets are located) Currently, 17 states and the District of Columbia have some type of death tax. Some states adjust their exclusion amounts to reflect the federal exclusion whereas others do not. States may reconsider their approach in light of the ballooning federal exclusion It will be important to review formula clauses in existing Wills. Many existing Wills allocate all of the exempt amount to an exempt trust which may be held for a large pool of discretionary beneficiaries. The large exclusion may reduce or completely eliminate the amount passing into a marital trust Gifting up a generation? Some taxpayers may make a gift to a parent as a way to have the assets stepped-up at the parent s death. Caution: This assumes that the exempt amount is not subsequently reduced. It also requires the parent to outlive the gift by one year Avoid making lifetime gifts of appreciated assets with a low basis
Will Planning for US Citizens Resident in the UK Deemed Domiciled Before Tax Reform Last Will (Integrated US/UK Will) (Pre-Reform Exemption Amount) A B C Nil Rate Band Trust 325k / $500k Excess US Exemption $5.1m QTIP / QDOT Excess over $5.6m Discretionary income and capital f/b/o SS and further descendants SS entitled to income, subject to Trustee s OPA SS entitled to income
Will Planning for US Citizens Resident in the UK Deemed Domiciled After Tax Reform Last Will (Integrated US/UK Will) (Post Reform Exemption Amount) New exemption amount expires in 8 years on December 31, 2025 A B C Nil Rate Band Trust 325k / $500k Excess US Exemption $10.7m QTIP / QDOT Excess over $11.2m Discretionary income and capital f/b/o SS and further descendants SS entitled to income, subject to Trustee s OPA SS entitled to income
Will Planning for US Citizens Resident in the UK NOT Deemed Domiciled Before Tax Reform Last Will (Integrated US/UK Will) (Pre-Reform Exemption Amount) A C US Exemption $5.6m (with UK assets up to NRB amt) Discretionary income and capital f/b/o SS and further descendants QTIP / QDOT Excess over $5.6m (includes UK assets in excess of NRB amount) SS entitled to income
Will Planning for US Citizens Resident in the UK NOT Deemed Domiciled After Tax Reform Last Will (Integrated US/UK Will) (Post Reform Exemption Amount) New exemption amount expires in 8 years on December 31, 2025 A B C US Exemption $11.2m (with UK assets up to NRB amt) Discretionary income and capital f/b/o SS and further descendants Excess US Exemption Amount not used in Fund A. E.g., UK assets in excess of 325K, up to US exemption amount SS entitled to income QTIP / QDOT Excess over $11.2m SS entitled to income
What about an English Will for a US Citizen? Last Will (English Will for US Citizen?) Proceed With Caution! No marital deduction for US purposes, so full value of decedent s assets (including likely 100% of any jointly owned property if SS is non-us) included in taxable estate; Uncertainty re applicable exemption amount - expires in 8 years; Nil Rate Band Trust 325k Life Interest Trust for Surviving Spouse Balance States that impose estate/inheritance taxes often have lower exemption amounts, so disallowance of marital deduction could trigger state level estate taxes on certain US situate assets (including assets that may be acquired after signing the Will) Trusts established for SS and US children will likely be FNGT, so distribution management, or migration or decanting into US domestic trust may be required to help manage the throwback rules; GPOAs and GST concerns - does the Will include other protective US provisions, such as provisions to avoid grantor trust and GPOA powers and GST issues?
Excluded Property Trust Planning Before Tax Reform US citizen resident in the UK not domiciled or deemed domiciled for UK purposes could transfer non-uk assets to a trust that qualified as an excluded property trust and shelter such assets from UK IHT. The overall US/UK death tax benefit was limited, however, to the US FET exemption amount. For example, an EPT funded with non-uk assets of $5.6m would result in an IHT savings of 40% of the difference between $5.6m and 325k an IHT savings of over $2m. After Tax Reform With the new US FET exemption ($11.2m), the potential UK IHT savings on a fully funded excluded property trust are more than double the previous IHT savings. Some potential EPT options May be structured just for UK IHT benefits or to take advantage of UK income and CGT benefits
Changes to CFC Definitions Repeal of 30-day rule Effective for taxable years of Forco beginning after 31 December 2017 (prospective) US shareholder now either 10% vote or value Effective for taxable years of Forco beginning after 31 December 2017 (prospective) Requires downward attribution Effective for last tax year of Forco beginning before 1 January 2018 (retroactive to 2017!)
Downward Attribution Example UK 15% UK 40% US 45% UK Parent 100% 100% US UK Sub UK Sub is CFC under new rules and US shareholder has an inclusion even though UK parent is not a CFC
Repatriation Tax One-time inclusion by US shareholders of income deferred in a specified foreign corporation Specified foreign corporation: CFC or foreign corporation with at least one 10% domestic corporate voting shareholder (applying relevant attribution rules) Deferred foreign income: post-1986 undistributed earnings and profits with certain adjustments (e.g. reduced for ECI and PTI) - Measured on November 2, 2017 or December 31, 2017 (whichever is greater) Inclusions taxed at 15.5% to the extent of SFC s cash and cash equivalents; 8% for the remainder - Higher rates for individual shareholders (approximately 17.5% and 9%) Tax paid over 8 years if elected Multiple Notices (2018-7, 2018-13 and 2018-26) FAQ, Revenue Ruling 2018-17 issued on specific points (e.g., definitions, allocations between multiple inclusion years, method of making installment/deferral elections, DFIC/E&P deficit corporations, elimination of intercompany transactions etc.)
GILTI Global Intangible Low-Taxed Income GILTI inclusion for US shareholders of CFCs GILTI is net CFC tested income LESS 10% of basis of tangible, depreciable property used in CFC s trade or business Net CFC tested income is tested income less tested loss = gross income other than Subpart F, related party dividends, ECI and high-taxed income less allocable deductions Foreign tax credits may be available for 80% corporation tax paid (with election for individual)
GILTI/FDII Deduction Available to US corporations (likely not individuals, other non-corporate taxpayers) Deduct 50% of GILTI inclusion until 2025, then 37.5% Results in disparity between corporate and non-corporate taxpayers Deduct 37.5% of FDII until 2025, then 21.875% FDII = specified income derived in connection with (i) property sold to a non-us person for non-us use OR (ii) services provided by the taxpayer to any person or with respect to property outside the US
Dividends Received Deduction 100% DRD for US corporate shareholder for foreign source portion of dividend from 10% owned foreign corporation Limited scope - effectively only applies to 10% owned foreign corporations that are neither CFCs nor PFICs FTC disallowed for any portion attributable to amount excluded under DRD Requires at least 366 day holding period Regulations required e.g. on ownership through partnerships
Partnership ECI and Witholding Context: Revenue Ruling 91-32 and Grecian Magnesite Mining (2017, TC case) New sourcing rule: gain or loss from non-us partner s sale of partnership interest is ECI to the extent sale of partnership s assets would be ECI to the partner New withholding tax rule: requires (i) purchaser to withhold 10% of TOTAL purchase price, and (ii) partnership to withhold this amount from distributions to purchaser if purchaser does not withhold Full 10% withholding even if de minimis ECI, subject to IRS procedure to request reduced withholding Notice 2018-8 suspended withholding tax on dispositions of PTP interests pending further guidance and requested comments on whether temporary suspension for other dispositions is required
Carried Interest 3-year holding period for long-term capital gain attributable to partnership interest received in connection with performance of services for investment partnerships Appears to apply to (i) gain on partnership sale of assets and (ii) partner sale/redemption of partnership interest Impact on private equity / real estate funds
Other Changes Qualified business income deduction Interest barrier (30% EBITDA) Anti-hybrid rules Foreign tax credit changes Bonus depreciation BEAT