Brexit's Impact on US Taxes

The United Kingdom's vote to leave the European Union (EU) is going to have a lot of impact on international trade, not to mention the American economy and tax policy. Americans with UK-sourced income and businesses looking to enter the UK market should take heed of the impending changes and how they will affect their tax liabilities. Here's an overview of Brexit's impact on American businesses and American expats who live and work abroad in the UK.

Brexit Impact on Income Taxes

For taxpayers who have UK-sourced income, you may see a reduction in your tax bill because the exchange rate between the US dollar and pound sterling (GBP) is already down about 8% from 2015. Analysts expect that GBP could fall by 10% by 2017. You will receive fewer dollars back from GBP as it will be the closest in parity to the dollar that it's been in over 30 years. If you have business expenses in the UK this will also reduce them but your UK-sourced income will also fall.

If you have investment income that is UK-sourced, DIRT (dividend and interest retention tax) rates may change. You may have more taxes withheld from your investments which reduces the amount you receive but grant you a larger foreign tax credit or deduction. However, the EU treaties that have prevented double taxation of investment income have been nullified.

For business taxpayers with substantial income and presence in the UK, the loss of the EU's Parent-Subsidiary Directive can exponentially raise business tax bills. There is also speculation that the Capital Duties Directive will return which is a tax levied on capital raised.

Tax Treaties and Potential Further Secession

Brexit is causing treaties that relied on the massive bargaining power of the EU to be renegotiated from the ground up. The US-UK tax treaty isn't currently facing any major changes for Americans who have UK-sourced income and no substantial presence there or non-residents with UK residency and US-sourced income. The tax treaty may still be renegotiated in the face of international trade and workforce shifts and the fact that the UK has been the most major economic and political touchstone for America's dealings with the EU.

In addition to other countries discussing leaving the EU, policy analysts in Scotland and Northern Ireland have brought up seceding from the UK in order to preserve the powers and protections they receive from the EU. If your company is establishing presence in these countries or plans to earn a significant amount of income from them, now would be a good time to consider restructuring. If Scotland and Northern Ireland leave the UK, they'll also have to draft their own tax treaties.

Americans Working Abroad

Brexit's impact on expat taxes is largely tied to the currency shift and immigration laws. Because the UK uses a point system for expats who are not from EU countries which has normally allowed these residents to easily come and go, Americans working abroad won't see an immediate impact since EU status never affected them. If additional visa restrictions and work requirements are enacted now that the EU resident category doesn't exist in the UK, Americans working abroad who don't meet the new requirements may fail the substantial presence test when it comes to the foreign earned income exclusion.

To book a consultation to learn more about Brexit's potential impact on your personal taxes or business, please contact Dukhon Tax by calling 617 651 0531 or by emailing [email protected].

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