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  • Writer's pictureInchmead

Biden’s capital gains tax reforms could boost HMRC revenues

US President Joe Biden’s plans to increase capital gains tax in the US might see an increase in UK tax revenue as American citizens may declare income in the UK for tax credits, according to Adam Bonnell, tax partner at HW Fisher.

Biden presented his American Family Plan on Wednesday, proposing an increase in capital gains tax to 39.6 percent for households earnings more than $1m per year, up from 20 percent.

In a press conference, President Biden said: “It’s time for corporate America and the wealthiest 1 percent… to pay their fair share.”

The move means that federal tax rates for those earning more than $1m could be as high as 43.4 percent, including a 3.8 percent existing surtax to fund the Affordable Care Act.

US citizens based in the UK are taxed on their worldwide income and don’t necessarily have to pay UK tax on non-UK assets. However, this could change due to Biden’s proposed tax reforms, according to Bonnell.

“With a near enough 40 percent tax rate in the US, there’s an incentive for those individuals to pay tax on their income and declare in the UK,” he says. “If they pay the UK capital gains tax, they’ll get a credit for that in the US against their 40 percent.

“There’s no additional capital costs for them to keep assets outside the UK. I suspect what will be seen in the future, if the rate comes in, is a lot more Americans bringing income into the UK, paying the 20 percent tax and claiming that as a credit. So, the increase in US taxes could actually result in an increase in the UK tax cake.”

Speculation of Biden’s tougher tax reforms have weighed on US equities, said Greg Limb, global head of family office and private client at KPMG.

“As Biden’s plans unfold, we will get a better understanding of the potential impact on investors and the investment industry,” he said in an email. “The key is when these changes, if enacted, come into effect and whether this gives investors time to take action.”

UK-based American clients are now looking at their assets and seeing if they can sell some before the increase comes in, according to HW Fisher’s Bonnell.

However, Biden could be looking at implementing the new proposals sooner rather than later to limit this, according to Martin Lambert, tax partner at Grant Thornton UK.

“They’re already quietly debating whether to make the change effective when the proposal is formally introduced. This would prevent taxpayers from selling assets or churning their portfolios in advance of the rate increase. The decision may hinge on how government scorekeepers estimate the revenue increase for various effective date options.”

Tax increases under the American Family Plan will support social funding initiatives such as paid family leave, health insurance subsidies and free tuition at community colleges. The Family plan is estimated to be valued at around $1.8trn (£1.3trn).

However, raising the targeted estimated revenue will depend on how the market reacts to the proposed tax reforms, according to KPMG’s Limb.

“The purpose of the legislation is both to raise revenues and place more of the tax burden on wealthier taxpayers. What is unknown and could be problematic is the market reaction and potential harm to the value of equities.”

Tax leaders, however, are in doubt about whether Biden’s reforms will make it through Congress in in full.

“Given that any legislation will require a majority of Congress to vote for passage, it is far from certain that any ultimate legislation will be resemble what President Biden has proposed,” said Limb.

“The democratic party holds a slim majority over Congress and its members have a wide range of political views, and so coming to a consensus legislation will be a challenge.”

Source:AccountancyAge & Aoife Morgan


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