Skip to main content

Uncertainty in the US election is worst possible outcome for American taxpayers in the UK

Delay and uncertainty in the US elections will affect Americans living and working in the United Kingdom, says John Bull.

What we appear to be facing is the worst possible outcome for overseas Americans who in the event of a Biden victory have little time to plan their Estate and Gift Tax affairs before 31 December 2020.

Now every day of delay is unwelcome. In the event of a significant delay there is now the risk that we need to begin planning for what might happen, rather than dealing with certainty.

The threat to a reduction of the Estate and Gift Tax exemption has been a focus for many high net worth ‘overseas Americans’ and they have been looking at possible planning opportunities with advisors pending the result of the election.

The risk of a significant delay or even a Supreme Court challenge to the US Presidential results places extreme time pressure on the execution of any Estate and Gift Tax planning before the end of 2020, as this often requires the complex legal drafting that is associated with the settlement of trusts.

If challenger Joe Biden is eventually declared the winner, the generous Estate and Gift Tax exemption of $11.58m could be in danger of being significantly scaled back in 2021 and it is likely that such changes could be made effective from 1 January 2021.

The USA is unique amongst developed nations in subjecting all of its citizens to income and estate taxes regardless of whether they live in the United States. Just as on a domestic level, the numerous ‘overseas Americans’ will have been following the outcome of the Presidential and Congressional elections carefully in anticipation of possible changes to the Federal Income, Estate and Gift Tax.

If President Trump emerges as the winner of this disputed election, no change might appear to be the obvious answer. During the election, President Trump’s policy on taxes was to get the time-limited changes enacted in 2017 made permanent. In contrast, the Democrats wanted to reverse some of those 2017 changes, alongside other tax rises. The elections have resulted in the same stalemate that affected the latter part of President Trump’s first term. A Democrat controlled House of Representatives remains as a barrier to proposals favoured by the President and the Republican controlled Senate. Democrat proposals passed in the House would progress no further.

A similar stalemate would apply in the event of a Biden Administration, with the Republican Senate blocking Democrat proposals.

However, there might be some scope for compromise, whoever wins the Presidential election. If re-elected, President Trump would be in his second term and no longer having to act with an eye focused on a re-election campaign. Unless the costs associated with COVID-19 are to be exclusively funded by ever increased borrowing, some taxes will have to rise during the second Trump term. There could be extensive bargaining on which aspects of Democrat tax policy might be acceptable to both the Republican Senate and President Trump under a label of “beating the virus”.

If Joe Biden becomes president, the Republican Senate might also be up for a “beating the virus” compromise on increased taxes. That might involve some of what the Democrats suggested in broad outline during the campaign, including:

  • Returning the 37% maximum income tax rate to its pre-Trump level of 39.6%
  • Increasing the tax rate on capital gains from 20% to 28%
  • Taxing capital gains at the same rates as ordinary income
  • Ordinary income treatment of carried interest participations
  • An early reduction of the Estate and Gift Tax exemption from the current level of $11.58 million per person ($23.16 million per married couple) to where it would have been under pre-Trump legislation
  • Abolition of the ‘step-up’ basis for inherited assets (for capital gains purposes someone inheriting property would have the same cost basis as the person from whom they inherited, instead of being deemed to have basis equal to market value at the time of the previous owner’s death).

Would you like to know more?

If you would like to discuss the above or how it may affect you, please get in touch with your usual Blick Rothenberg contact or John Bull, using the details to the right.

For any press queries, please contact David Barzilay whose details are to the right.

Check the impact of the Spring Budget Statement with our Tax Calculator Visit our Spring Budget Hub