international investment b nds · 2019. 5. 16. · international investment b nds returning to the...

INTERNATIONALINVESTMENTB NDS

R E T U R N I N G T O T H E U KT E C H N I C A L TA X G U I D E – U KJ A N UA R Y 2 014

F O R P R O F E S S I O N A L A D V I S E R S O N LY, N O T T O B E D I S T R I B U T E D T O C L I E N T S This Technical Tax Guide is for general information only and must not be regarded as an offer or invitation to acquire an interest or participate in any International Investment Bond. Capitalised terms within this document have the meanings given to them in the definitions section of the (UK) Master Technical Guide.

I S S U E D B Y U T M O S T W O R L D W I D E L I M I T E D

This Technical Tax Guide is for general information only and must not be regarded as an offer or invitation to acquire an interest or participate in any International Investment Bond.

3T I M E A P P O R T I O N M E N T R E L I E F ( TA R )

6C A S E S T U D I E S

7R E T U R N I N G T O T H E U K R U L E O F T H U M B

R e t u r n i n g t o t h e U K | 3

T I M E A P P O R T I O N M E N T R E L I E F ( TA R )


W H AT I S T I M E A P P O R T I O N M E N T R E L I E F ?

TAR is a relief on international investment bonds which allows a reduction of the amount liable for UK Income Tax on a chargeable gain. For plans issued on or after 6 April 2013, this reduction is calculated by reference to the period during which the person liable to Income Tax on the chargeable event gains was not resident in the UK. For plans held before 6 April 2013, these rules generally apply if the planholder has been non-UK resident at any time during the life of the plan. This tax relief may reduce any Chargeable Gain (CG) on full/part surrender as follows: TAR reduced CG = CG x (R/T), where R is the number of days in the ‘material interest period’ for which the person liable to Income Tax under the post-5 April 2013 rules (or the planholder of an unaffected pre-6 April 2013 plan) was resident in the UK and T is the total number of days in the ‘material interest period’.

The ‘material interest period’ is the period where: i) the person liable to Income Tax under the post-6 April 2013 rules beneficially owns the rights under an International Investment Bond; ii) the rights are held on non-charitable trusts which that individual created; or iii) the rights are held as security for that individual’s debt. For unaffected pre-6 April 2013 plans, the ‘material interest period’ is the period during which the planholder owns the International Investment Bond before the chargeable event occurs.

“ T H E C O S T O F D E L AY ” :

The countdown to TAR should start immediately because…

I N T E R N AT I O N A L I N V E S T M E N T B O N D S ( I I B ) A R E U S E F U L I N V E S T M E N T V E H I C L E S F O R U K E X PAT S A N D I N PA R T I C U L A R F O R T H O S E W H O I N T E N D TO R E T U R N TO T H E U KInternational investment bonds can prove to be very efficient investment vehicles for your clients, as growth rolls up virtually free of tax (subject to withholding tax), and on return to the UK, they can see their chargeable gain (if any) being proportionately reduced on full or part surrender by the time they were abroad throughout the plan life.

Delaying the purchase of an International Investment Bond, while abroad, will result in a smaller reduction of the chargeable gain on full/part surrender after subsequent return to the UK.

For example, Carol invested in an International Investment Bond for her own benefit while she was working in Dubai and returned to the UK 4,000 days later where she fully surrendered the bond 2,500 days following her return. Her CG (if any) is reduced to 2,500/ 6,500 of the original CG, where R is 2,500 and T is 6,500 (i.e. 4,000 + 2,500). For plans issued before 6 April 2013, TAR does not apply where the bond has been held by non-UK resident trusts or by foreign institutions. This exclusion has been relaxed for plans issued on or after 6 April 2013.

Assume an individual is non-UK resident for a given period of time, say 6 years, and while abroad they decide to invest in an International Investment Bond with a 10 year lifespan. If they decide to invest in the bond immediately on becoming non-UK resident, any chargeable gain on full surrender at the end of the bond’s 10 year life would be reduced by 60% [6/(6+4)].

However, if they instead only decide to invest in the bond 2 years after first becoming non-UK resident, the proportionate reduction of the chargeable gain on full surrender after 10 years would only be 40% [4/(4+6)].

4 | R e t u r n i n g t o t h e U K

R E S I D E N C Y A B R O A D U K R E S I D E N T

U K I N C O M E T A X L I A B I L I T Y

No liability Liability to UK Income Tax for the period of UK residency

R E D U C T I O N O F U K T A X L I A B I L I T Y

N/A

S T E P 1 – T A R S T E P 2 – T O P S L I C I N G R E L I E F ( T S R )

Reduces proportionately the Chargeable Gain (CG)

If applicable, reduces the marginal liability to the higher or additional rates of UK Income Tax on the Chargeable Gain (CG) after TAR

has been applied (excluding the period of non-UK residency)

T I M E A P P O R T I O N M E N T R E L I E F ( TA R )

T O P S L I C I N G R E L I E F ( T S R ) M AY B E A V A I L A B L E A F T E R TA R

TSR may also be available to further reduce any tax charges even where TAR has been applied. TSR is based on the period of UK residency during the ‘material interest period’ (e.g. if an International Investment Bond is owned for 10 years (3,652 days) and the planholder was non-UK resident for 6 years (2,191 days), the number of years applicable for TSR is 4 years (1,461 days)).

TSR can reduce the impact of a chargeable gain that pushes the planholder into the higher or additional rate UK Income Tax band by applying a spreading mechanism, i.e.

TA R I S AVA I L A B L E O N Y E A R LY D E E M E D G A I N S ( Y D G) O F P E R S O N A L P O R T F O L I O B O N D S ( P P B S )

The PPB (Tax) legislation (Statutory Instrument 1999 No 1029 and ITTOIA (sections 515 to 526))

The PPB legislation imposes a yearly tax charge on UK resident individuals, UK resident settlors or UK resident trustees (in general, only where the settlor is not UK resident or has died), personal representatives and, in limited circumstances, non-UK resident trustees and foreign institutions who hold international investment bonds in certain circumstances where unacceptable assets or indices (as opposed to permitted assets or indices as referred to in sections 518 and 520 ITTOIA) can be selected as underlying assets of the International Investment Bond by the planholder. Such international investment bonds are known as PPBs within the scope of the law.

the effect of TSR is to reduce in some circumstances the rate of tax charged on the chargeable gain by applying a spreading mechanism. TSR is not available to corporations or trustees (although the individual assessed on the chargeable event gain on a plan that has been vested in trustees may have a right of reimbursement) and is also not available on Personal Portfolio Bonds (PPB).

For further details on TSR and how it is calculated please refer to the section 3.6.2. ‘Top Slicing Relief (TSR)’ of the Master Technical Guide.



W H AT I S A V A I L A B L E F O R P P B S ?

TSR DEFICIENCY RELIEF (DR)* TAR 5% CUMUL ATIVE ALLOWANCE (5% CA)**

✗ ✗ ✓ ✓

*Where the result of a gain calculated on a full surrender or death shows a negative figure or ‘deficiency’ and the chargeable person is an individual, a relief called Deficiency Relief may be available to set off against that individual’s income, which is liable to tax at the higher rate subject to the amount of any previous Excess Gains assessed for UK tax. For further details please refer to section 3.6.3. ‘Deficiency Relief (DR)’ of the Master Technical Guide.

**This is 5% of any premium(s) paid each year, e.g. for an individual who invested £200k into an International Investment Bond, the maximum that individual can withdraw in Insurance Year 10 without incurring an immediate UK Income Tax liability is 50% (5% x 10 years) of the invested premium, i.e. £100k. For further details please refer to section 3.5.2. ‘Part surrender and 5% tax deferral rule’ of the Master Technical Guide.

A PPB UK tax charge occurs at the end of each Insurance Year while the PPB owner is UK resident. › The PPB UK tax charge is not based on actual gains. Instead, this is a yearly charge which occurs at the end of each Insurance Year, other than the ‘final Insurance Year’ (e.g. other than the year of full surrender of rights or death of the relevant life assured), while the PPB owner is UK resident.

› The legislation assumes a deemed gain of 15% of the sum of the premium(s) invested during the life of the PPB and the accumulation of the ‘yearly deemed gains’ (YDG) for each year the PPB has been in force which is referred to as the ‘cumulative deemed gains’ (CDG). The calculation of the PPB YDG for any Insurance Year is as follows:

PPB ‘yearly deemed gain’ = (Total premiums PLUS CDG previously taxed in

the UK LESS Previous Excess Gains*) X 15%

*This occurs when a withdrawal exceeds the permitted ‘5% Cumulative Allowance’. For further details please refer to section 3.5.2. ‘Part surrender and 5% tax deferral rule’ of the Master Technical Guide.

› For example, a PPB which commences in the tax year 2015/2016 with a single contribution of £50,000 will be deemed to have had a taxable gain of £7,500 (15% of £50,000) for its first Insurance Year. In the tax year 2016/2017, the same PPB will be deemed to have had a taxable gain of £8,625 (15% of (£50,000 + £7,500)) assuming no previous Excess Gains taxed in the UK for its second Insurance Year. The taxable gain figures will continue to escalate in this manner until the PPB is finally surrendered. This special tax basis does not apply in the tax year in which the PPB is finally surrendered.

› The PPB UK tax charge arises on the last day of each Insurance Year that the PPB owner is UK resident. Thus, once the PPB owner is resident abroad, the 15% tax charge will not apply but the PPB will still be taken into account for roll-up of CDG.

PPB considerations › To avoid the PPB UK tax charge, the PPB must be endorsed to restricted assets or indices (see sections 518 and 520 ITTOIA) which must be available for selection by all planholders of the life office or a class of planholders provided that class is published by the life office and does not comprise connected persons. This endorsement must take place no later than the last day of the Insurance Year which started in the tax year in which the PPB owner(s) became UK resident. The PPB UK tax charge will only cease to apply in the Insurance Year which ends after the plan has been endorsed*.

* For example, considering that the UK tax year starts on the 6th of April and finishes on the 5th of April of the following year, if a PPB owner, whose PPB commenced on 1 April 2010, became UK resident on 1 June 2015, the last day to endorse the PPB would be 31 March 2017 and no tax charge for the PPB “yearly deemed gain” (YDG) would apply for the Insurance Year 1 April 2015 – 31 March 2016 and 1 April 2016 – 31 March 2017. Similarly, if a PPB owner whose PPB commenced on 1 May 2010, became UK resident on 1 June 2015, the last day to endorse the PPB would be 30 April 2016 and no tax charge for the PPB YDG would apply for the Insurance Year 1 May 2015 – 30 April 2016.

› Consideration should be given to the assets held within the PPB prior to returning to the UK as the non-restricted assets will have to be sold before the PPB is endorsed. So certain assets, such as those with redemption penalty periods or other restrictions on sale, may not be the most suitable assets for individuals returning to the UK who wish to endorse their PPB.

› CDG will help reduce the PPB owner’s chargeable gain in the event of full surrender or death. When calculating the chargeable gain on full surrender or death, the CDG can be taken off the final chargeable gain but only up to the amount of YDG that have been already subject to UK tax (see case studies below).

› TAR is available for any YDG as follows:

YDG as reduced by TAR = YDG x (R / T), where R is the number of days the PPB person liable to pay Income Tax on the gains of a PPB (or the planholder of an unaffected pre-6 April 2013 policy) was resident in the UK and T is generally the number of days the PPB was in force.


6 | R e t u r n i n g t o t h e U K

Insurance Year

ending

PPB YDG calculationYDG = (Premium PLUS CDG

previously taxed in the UK MINUS Previous excess gains) X 15%

YDG CDG

30/04/12 YDG1 = (£200,000 + 0 – 0) x 15% £30,000 £30,000

30/04/13 YDG2 =(£200,000 + YDG1 – 0) x 15% = (£200,000 + £30,000 – 0) x 15% £34,500 £64,500

30/04/14 YDG3 =(£200,000 + (YDG1 + YDG2) – 0) x 15% = £264,500 x 15% £36,795 £104,175

30/04/15 YDG4 =(£200,000 + (YDG1 + (…) + YDG3) – 0) x 15% = £304,175 x 15% £45,626 £149,801

30/04/16 YDG5 =(£200,000 + (YDG1 + (…) + YDG4) – 0) x 15% = £349,801 x 15% £52,470 £202,271

CASE STUDY 1 – CASE STUDY 2 –

STEP 2 – INCOME TAX PAYABLE (assuming the PPB owners are higher rate tax payers).

INCOME TAX = £52,470 X 40% = £20,988STEP 3 – CALCULATION OF THE CHARGEABLE GAIN (Full Surrender*)

CG = (Surrender value + All previous withdrawals) LESS (Total premiums paid + Any previous chargeable gains + YDGs previously taxed (for PPB only))*For further details please refer to Section 3.5.1. ‘Whole of rights given up on full surrender, Assignment for money or money’s worth or death giving rise to benefits’ of the Master Technical Guide.

CG = (£350,000 + 0) – (£200,000 + 0 + £52,470) = £97,530STEP 4 – CALCULATION OF THE TIME APPORTIONMENT RELIEF

TAR reduced CG = CG x (Total number of days resident in the UK during the ‘material interest period’/ Total of days the PPB has been in force).

TAR REDUCED CG = £97,530 X (274/1980) = £13,497STEP 5 – INCOME TAX PAYABLE (assuming the PPB owners are higher rate tax payers).

INCOME TAX = £13,497 X 40% = £5,399

They have not endorsed the PPB. Therefore, their liability to Income Tax will be £20,988 for the 2016/17 tax year and the deemed gains will continue to accumulate for PPB UK tax charge purposes until they decide to endorse the PPB. The Income Tax liability on full surrender (30/09/16, where the final Insurance Year runs from 01/05/16 to 30/09/16) is £5,399. Their overall Income Tax liability following return to the UK is thus £26,387 (i.e. £20,988 + £5,399).

CG = (Surrender value + All previous withdrawals) LESS (Total premiums paid + Any previous chargeable gains + YDGs previously taxed (for PPB only))

* For further details please refer to Section 3.5.1. ‘Whole of rights given up on full surrender, Assignment for money or money’s worth or death giving rise to benefits’ of the Master Technical Guide.

CG = (£350,000 + 0) – (£200,000 + 0 + 0) = £150,000STEP 2 – CALCULATION OF THE TIME APPORTIONMENT RELIEF TAR reduced CG = CG x (Total number of days resident in the UK during the ‘material interest period’/ Total of days the PPB plan has been in force).

TAR REDUCED CG = £150,000 X (274/1980) = £20,758STEP 3 – INCOME TAX PAYABLE (assuming the PPB owners are higher rate tax payers).

INCOME TAX = £20,758 X 40% = £8,303

They have endorsed the PPB plan before 30/04/16 and no Income Tax will be payable in respect of PPB UK tax charges thereafter. Hence, they will not be liable to Income Tax on the YDG of £52,470 as calculated in step 1 of case study 1, saving £20,988 on Income Tax. The Income Tax liability on full surrender (30/09/16, where the final Insurance Year runs from 01/05/16 to 30/09/16) is £8,303. (This is the overall Income Tax liability following return to the UK which saves the PPB owner £18,084 compared to case study 1, i.e. £26,387 LESS £8,303).

Patricia and Terence have not endorsed the PPB before 30/04/16

Endorsement of the PPB plan before 30/04/16

STEP 1 – CALCULATION OF THE YEARLY DEEMED GAIN (YDG) WHEN THEY RETURN TO THE UK.

STEP 1 – CALCULATION OF THE CHARGEABLE GAIN (FULL SURRENDER*)

C A S E S T U D I E S

P AT R I C I A A N D T E R E N C E , B O T H U K D O M I C I L E D , W E N T T O W O R K I N D U B A I F O R A L M O S T F I V E Y E A R S W H E R E T H E Y I N V E S T E D £ 2 0 0 , 0 0 0 O N 0 1 / 0 5 / 11 I N T O A P P B . T H E Y R E T U R N E D T O T H E U K O N 0 1 / 0 1 / 16 A N D F U L LY S U R R E N D E R E D T H E P P B O N 3 0 / 0 9 / 16 F O R £ 3 5 0 , 0 0 0 .



RETURNING TO THE UK RULE OF THUMB

Consider starting to invest in an International Investment Bond sooner rather than later upon leaving the UK. Delaying the investment means less TAR on growth. In addition, be mindful of endorsing PPBs when deciding to return to the UK. Note also that, for years of departure from 6 April 2013, an individual who is temporarily non-UK resident (i.e. their period of non-residence is 5 years or less and other conditions are met) is liable to Income Tax on a chargeable event gain accruing in respect of a plan which started prior to the period of non-residency. The Income Tax charge occurs in the year of return to the UK, however, TAR should still be available in respect of the non-resident period.


C O N TA C T U S

To find out more please contact us.

+44 (0) 1481 714 108

+44 (0) 1481 712 424

[email protected]

Utmost Worldwide LimitedUtmost HouseHirzel StreetSt Peter PortGuernseyChannel Islands GY1 4PA

utmostworldwide.com

Utmost Worldwide Limited is incorporated in Guernsey under Company Registration No. 27151 and regulated in Guernsey as a Licensed Insurer by the Guernsey Financial Services Commission under the Insurance Business (Bailiwick of Guernsey) Law, 2002 (as amended).

Registered Head Office: Utmost House, Hirzel Street, St Peter Port, Guernsey, Channel Islands GY1 4PA.

T +44 (0) 1481 715 400 F +44 (0) 1481 715 390 E [email protected]

Websites may make reference to products that are not authorised or regulated and/or are not available for offering to planholders in certain jurisdictions.

UWWS IIB UK TTG RUK 02’19

Utmost Wealth Solutions is the trading name used by Utmost Worldwide Limited and a number of Utmost companies.

The information contained in this document is based on Utmost Worldwide’s understanding of UK law and Her Majesty’s Revenue and Customs (HMRC) practice as at January 2014, which may change in the future, and no other jurisdiction.

The information in the case studies is for illustrative purposes only and should not be relied upon for decisions relating to individual circumstances. Independent tax advice should always be sought by clients as regards the tax laws of their jurisdiction(s) of residence and/or domicile before investing in an International Investment Bond. Every care has been taken to ensure the accuracy of the information contained in this document, but Utmost Worldwide can accept no responsibility for any actions taken or decisions made as a result of this document. This document contains general comment/ information only and does not give advice on any particular matter or individual circumstances. This document is not intended for Hong Kong and Singapore residents.


international investment b nds · 2019. 5. 16. · international investment b nds returning to the...

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