Is Bidenomics affecting US/UK tax and estate planning?
23 / 02 / 2022
To understand Bidenomics you have to ask how this new approach has come about. The backdrop is failing traditional economic policy – such as tax cuts to boost growth, deregulation to boost productivity and welfare cuts to reduce dependency and state handouts. Failing, because the tax cuts etc. did not boost investment or productivity in the US and manufacturing continued to shift to China, who promised unrivalled competition on speed and cost. Inequality continued to soar and children were not doing better than their parents. Covid and Trump then came together to produce the catalyst for Joe Biden’s “socialist” Build Back Better plan, which aims to provide for mass government investment, along with measures to encourage joint ventures between state and the private sector.
Bidenomics focuses on providing cash benefits (see the $1.9tn Covid Relief bill which went through Congress recently without too much fuss), support for the unions, care jobs (see the infrastructure bill), student debt cancellation, immigration and environmental protection (e.g. lead removal, charging stations, modernisation of the electric grid).
Apparently the funding for this does not rely on tax hikes or restricted tax reliefs but more on high employment in domestic industries, subsequent redistribution of wealth and the creation of an internationally competitive innovation/tech sector. That said, Joe Biden would like to increase personal and business taxation across the board.
If that is true, what will the impact be for those US connected people living in the UK?
There is concern that Biden’s plan to double capital gains tax (“CGT“) in the US (over a threshold of $1m) to the highest in the OECD could set a precedent over here for similar increases. Although not a huge revenue raiser, a slight increase to CGT, whatever the Cabinet/Treasury say, cannot be discounted. UK corporation tax is already increasing to 25% from next year for large trading and all investment companies. We already have the increased 1.25% dividend rates from April 2022 and the government seem set on continuing with the increase to national insurance contributions to help pay for social care.
What about inheritance tax across the pond and here?
The UK government has confirmed that they will not be looking at further changes to inheritance tax at this time, which means that for now there is a nil rate band of £325,000 per person and, on death, a 40% tax charge subject to reliefs such as spousal, charitable, business or agricultural. The seven year rule relating to unlimited lifetime gifts of capital is safe for now but we are still advising clients to take advantage of this where they can and get the clock ticking. In the US the $11.7m federal estate tax exemption was expected to reduce to $6m this year but to date nothing has been officially confirmed, so the default sunset date of 2026 remains when the allowance will automatically revert to $5m (indexed for inflation from 2010).
Wherever Bidenomics may take us, when US and UK taxes are in play it is always important to ensure that lifetime and death planning dovetail and careful structuring is put in place – whether that is a qualifying domestic trust in the US so that a non-US citizen surviving spouse can benefit from the US estate tax marital deduction or the main home in the UK is not owned by the US citizen spouse so as to ensure that on sale there is no CGT on the gain. Simple planning in the UK with Individual Savings Accounts and life insurance trusts can offend rules in the US and standard living trusts in the US can cause all sorts of issues with inheritance tax in the UK. In short, take specialist US/UK tax advice, as there are plenty of pitfalls out there for the inexperienced; luckily, for those of us that advise US/UK clients regularly there are some helpful fully accepted solutions too.