CASE STUDY:
Retired
Personal status:
Couple in their early sixties.
Expat status:
Retired to Cyprus five years ago.
Financial status:
UK pensions income about £35,000 per annum. UK investment income £20,000 per annum. Flat in Cyprus now worth £350,000. UK family house worth £500,000. UK investment property worth £500,000 with mortgage of £300,000 and rented out.
This couple will be tax resident in Cyprus and subject to Cyprus tax on their worldwide income. The maximum tax rate in Cyprus is 35pc but there is also a "tax" of up to 20pc as a "Defence Contribution".
The UK pension income would generally be subject to withholding tax in the UK, but the UK and Cyprus have ratified a tax treaty that normally gives the taxing right only to Cyprus. Pension income accumulated from services rendered abroad is taxed at a rate of only 5pc for amounts exceeding €3,420.
Moving the pension to a qualified recognised offshore pension scheme (QROPS) would be advantageous as the special member payment charges that apply to UK-registered schemes would be avoided.
The most punitive charge is the special 55pc death charge imposed on the remaining fund after the member's death. It should also mean that the couple could drawdown a greater level of income from their pensions as the UK's drawdown limits also cease to apply.
Depending on the type, income from investments in the UK might be subject to withholding tax in the UK, but this would generally be credited against tax due on the same income in Cyprus under the tax treaty. Moving the investments offshore should avoid any UK tax. Dividend income is exempt from tax in Cyprus but is still subject to the Defence Contribution at 20pc. Capital gains on qualified securities and funds are also tax-exempt in Cyprus.
The rental income on the investment property would be liable to UK tax but all expenses of maintenance and interest on the loan could be deducted. The couple could elect to be taxed according to the non-resident landlord scheme so the rental income can be received gross. The income after expenses would be subject to UK tax at the individual rates, but the couple would still enjoy their tax-free personal allowance, so the maximum rate would probably be only 20pc. Tax paid in the UK on rental income is allowed as a credit against tax due in Cyprus.
Their main concern should be UK inheritance tax (UK IHT). If they intend to remain in Cyprus for the rest of their lives, they could be domiciled in Cyprus. If so they would not be subject to UK IHT on their worldwide estate. Contrary to popular belief, the fact that they still own UK property would not be a barrier to claiming a non-UK domicile.
Irrespective of domicile, they would still be liable to UK IHT on any UK-situated assets. They each get an allowance in the UK of approximately £325,000, so a total allowance of £650,000. The total equity (value less loans) in their UK properties is £800,000. This would still leave them with a UK IHT liability of 40pc of the balance, being about £70,000. If they were still UK domiciled, IHT would bite on the whole of their estate. This would give them a substantial IHT bill in the UK. The couple should get certainty on their domicile.
There are steps they could take to mitigate IHT. If they are not domiciled in the UK, they could turn their UK investments into non-UK investments by transferring them to offshore companies so their asset was the shares in the non-UK company rather than the UK property itself. The shares would not be subject to UK IHT. The new penal taxes on residential property held by offshore companies apply to properties worth more than £2 million, so won't affect them.
Howard Bilton is chairman of The Sovereign Group and a barrister at law.
Showing posts with label UK pension. Show all posts
Showing posts with label UK pension. Show all posts
Sunday, February 17, 2013
Thursday, January 17, 2013
Making the most of a fresh start abroad
CASE STUDY
The Newly Moved Expat
Personal status:
Couple in their 30s with young children
Expat status:
just arrived Dubai on a three-year contract renewable
Financial status:
income of around £90,000 plus bonuses; spouse not working
Current investments/savings:
minimal
UK commitments:
mortgage, covered by rental income
He is working fulltime abroad so will be non-resident in the UK as long as he doesn’t return for more than 90 days a year.
Ordinarily, the day count is just one factor in determining when a UK resident has become non-resident, as some have found to their considerable cost. But in this case, the full-time employment contract means he can rely on day count to establish non-residency, so it should be relatively easy for him to ensure that he will be Dubai-resident for tax purposes throughout his stay.
If he can avoid spending more than 90 days in the UK he will pay only Dubai tax and the rate of tax in Dubai is a very lenient zero. If he can save money from his salary and bonuses he would benefit from paying those into a Qualifying Non UK Pension Scheme (QNUPS). QNUPS are particularly useful when no deduction against personal tax is required.
He will not be suffering personal income tax while in Dubai, so there would be no benefit in paying monies into a registered scheme which would generally give him a tax deduction. A QNUPS would provide greater benefit than the alternatives because the amounts built up within it escape the normal 55pc Member Payment Charge which would apply to the fund on his death. This charge is really an inheritance tax payable by funds belonging to UK domiciled persons.
The QNUPS will act as a tax-free savings vehicle for when he returns to the UK. There would be no tax payable on the capital gains and income made within the QNUPS until paid out. This means that when he returns to the UK his savings can be invested tax-free by his pension trustee. This is very advantageous. If he pays higher rate tax his returns should double, if made tax free, compared with the same returns made and taxed in the UK.
If the UK property is his main residence he would not pay capital gains tax (CGT) on resale, irrespective of his tax residency, as long as he correctly applies for principle private residence relief (PPR).
If it is an investment property, ordinarily he would pay CGT on resale but only if he was UK-resident at the time of sale. The UK is unusual in not charging CGT on a sale of UK assets if the owner is not UK-resident. If it is an investment property he would do well to sell it while in Dubai taking the gain tax free. He could reinvest into the UK property market, rebasing his acquisition cost. His CGT bill on the eventual sale if he went back to the UK would be reduced this way.
Or he could transfer investment property to his QNUPS. The transfer to the QNUPS would be tax free due to him being non-resident and any subsequent sale, irrespective of whether he was in the UK or not, would escape CGT because it would be made by his non-resident trustee.
Irrespective of his residence, the rental income generated by the property would be taxable in the UK because it is UK-source income. He would be allowed to deduct interest on loans secured on the property as long as they were taken out to purchase the property.
This is a point which many miss. If a property is remortgaged the new loan is not to purchase the property and relief from tax on the interest may be denied. He can also deduct all other costs of the maintenance of (but not improvements to) the property, including flights home to inspect or manage the property. In practice this normally means that there is little or no tax due.
Howard Bilton is chairman of The Sovereign Group and a barrister at law
The Newly Moved Expat
Personal status:
Couple in their 30s with young children
Expat status:
just arrived Dubai on a three-year contract renewable
Financial status:
income of around £90,000 plus bonuses; spouse not working
Current investments/savings:
minimal
UK commitments:
mortgage, covered by rental income
He is working fulltime abroad so will be non-resident in the UK as long as he doesn’t return for more than 90 days a year.
Ordinarily, the day count is just one factor in determining when a UK resident has become non-resident, as some have found to their considerable cost. But in this case, the full-time employment contract means he can rely on day count to establish non-residency, so it should be relatively easy for him to ensure that he will be Dubai-resident for tax purposes throughout his stay.
If he can avoid spending more than 90 days in the UK he will pay only Dubai tax and the rate of tax in Dubai is a very lenient zero. If he can save money from his salary and bonuses he would benefit from paying those into a Qualifying Non UK Pension Scheme (QNUPS). QNUPS are particularly useful when no deduction against personal tax is required.
He will not be suffering personal income tax while in Dubai, so there would be no benefit in paying monies into a registered scheme which would generally give him a tax deduction. A QNUPS would provide greater benefit than the alternatives because the amounts built up within it escape the normal 55pc Member Payment Charge which would apply to the fund on his death. This charge is really an inheritance tax payable by funds belonging to UK domiciled persons.
The QNUPS will act as a tax-free savings vehicle for when he returns to the UK. There would be no tax payable on the capital gains and income made within the QNUPS until paid out. This means that when he returns to the UK his savings can be invested tax-free by his pension trustee. This is very advantageous. If he pays higher rate tax his returns should double, if made tax free, compared with the same returns made and taxed in the UK.
If the UK property is his main residence he would not pay capital gains tax (CGT) on resale, irrespective of his tax residency, as long as he correctly applies for principle private residence relief (PPR).
If it is an investment property, ordinarily he would pay CGT on resale but only if he was UK-resident at the time of sale. The UK is unusual in not charging CGT on a sale of UK assets if the owner is not UK-resident. If it is an investment property he would do well to sell it while in Dubai taking the gain tax free. He could reinvest into the UK property market, rebasing his acquisition cost. His CGT bill on the eventual sale if he went back to the UK would be reduced this way.
Or he could transfer investment property to his QNUPS. The transfer to the QNUPS would be tax free due to him being non-resident and any subsequent sale, irrespective of whether he was in the UK or not, would escape CGT because it would be made by his non-resident trustee.
Irrespective of his residence, the rental income generated by the property would be taxable in the UK because it is UK-source income. He would be allowed to deduct interest on loans secured on the property as long as they were taken out to purchase the property.
This is a point which many miss. If a property is remortgaged the new loan is not to purchase the property and relief from tax on the interest may be denied. He can also deduct all other costs of the maintenance of (but not improvements to) the property, including flights home to inspect or manage the property. In practice this normally means that there is little or no tax due.
Howard Bilton is chairman of The Sovereign Group and a barrister at law
Monday, January 31, 2011
Protect Your Assets
Your UK pension is one of your most valuable assets but it's taxable in the UK.
Imagine if you could take control, save tax and invest in whatever you choose.
If you have lived or will be living outside the UK for 5 years or more then it is possible to transfer your UK pension to an HMRC approved offshore scheme.
Contact us to find out how:
info@SovereignGroup.com
Imagine if you could take control, save tax and invest in whatever you choose.
If you have lived or will be living outside the UK for 5 years or more then it is possible to transfer your UK pension to an HMRC approved offshore scheme.
Contact us to find out how:
info@SovereignGroup.com
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