James F. McDonough
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Some Differences In Tax Planning Between Jurisdictions
Author: James F. McDonough
Date: May 1, 2015
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Despite a common language, there are differences in tax planning when it comes to the United Kingdom (UK) and the United States (US).
The differences in tax planning are the direct result of a trends or a structural changes in tax law. Clearly, the trend is against the accumulation of wealth inside of trusts.
Trusts were a vehicle in the UK and the US for the accumulation of wealth for many years due to more favorable trust income tax rates. In 2006, the UK imposed a charge on trust principal of 6% to be paid every ten years. In addition, the UK imposed a transfer tax of 20% on every transfer in excess of £325,000 (the “Nil Band”). UK tax planning was forced to discontinue the extensive use of trusts because these toll charges would reduce principal significantly.
The UK corporate tax rate in 2012 was 24% for large corporations and 21% for small corporations in 2012. The individual UK tax rate was 50% and 45% in 2012 and 2013. The tax rate has declined to 20% for 2015 for both large and small corporations. It is easy to understand the renewed interest in using corporations to shelter income.
The US attack on trusts proceeded in a different manner. The US burdened trusts with the highest income tax rate (39.6%) and the tax on net investment income (3.8%) where income exceeded $12,300. Although the unified credit has increased, the income tax burden on trusts discourages excessive accumulation of income.
Planners in the UK gravitated to the use of corporations and limited partnerships with different classes of interests. In the UK, an outright gift escapes the 20% charge that would apply to a gift to a trust; however, a donor must survive seven years for the gift to escape UK Inheritance tax. Using outright gifts to the next generation and the Nil Band for gifts in trust, wealth transfers are being accomplished.
The ownership interests are a mix of redeemable preferred interests to the parent, income interests and redeemable interests to the children. The entity pays tax at a lower corporate rate. There is a zero income tax band up to (approximately) £34,000 so that distributions to children can escape income tax. The UK taxes income accumulated in a trust for a child under age 18 at a parent’s tax rate, somewhat similar to the US Kidde Tax. The UK tax provision does not apply to family investment vehicles so the directors may declare a dividend on a particular class of shares when a child attains age 18. This technique may not be acceptable in the US, however, it shows that culture and attitude toward commercial transactions influences what can be done.
What is clear is the bias is against trusts on both sides of the Atlantic.
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Some Differences In Tax Planning Between Jurisdictions
Author: James F. McDonough
Despite a common language, there are differences in tax planning when it comes to the United Kingdom (UK) and the United States (US).
The differences in tax planning are the direct result of a trends or a structural changes in tax law. Clearly, the trend is against the accumulation of wealth inside of trusts.
Trusts were a vehicle in the UK and the US for the accumulation of wealth for many years due to more favorable trust income tax rates. In 2006, the UK imposed a charge on trust principal of 6% to be paid every ten years. In addition, the UK imposed a transfer tax of 20% on every transfer in excess of £325,000 (the “Nil Band”). UK tax planning was forced to discontinue the extensive use of trusts because these toll charges would reduce principal significantly.
The UK corporate tax rate in 2012 was 24% for large corporations and 21% for small corporations in 2012. The individual UK tax rate was 50% and 45% in 2012 and 2013. The tax rate has declined to 20% for 2015 for both large and small corporations. It is easy to understand the renewed interest in using corporations to shelter income.
The US attack on trusts proceeded in a different manner. The US burdened trusts with the highest income tax rate (39.6%) and the tax on net investment income (3.8%) where income exceeded $12,300. Although the unified credit has increased, the income tax burden on trusts discourages excessive accumulation of income.
Planners in the UK gravitated to the use of corporations and limited partnerships with different classes of interests. In the UK, an outright gift escapes the 20% charge that would apply to a gift to a trust; however, a donor must survive seven years for the gift to escape UK Inheritance tax. Using outright gifts to the next generation and the Nil Band for gifts in trust, wealth transfers are being accomplished.
The ownership interests are a mix of redeemable preferred interests to the parent, income interests and redeemable interests to the children. The entity pays tax at a lower corporate rate. There is a zero income tax band up to (approximately) £34,000 so that distributions to children can escape income tax. The UK taxes income accumulated in a trust for a child under age 18 at a parent’s tax rate, somewhat similar to the US Kidde Tax. The UK tax provision does not apply to family investment vehicles so the directors may declare a dividend on a particular class of shares when a child attains age 18. This technique may not be acceptable in the US, however, it shows that culture and attitude toward commercial transactions influences what can be done.
What is clear is the bias is against trusts on both sides of the Atlantic.