Would you like to save yourself from a £199,836 tax bill when you get back to the UK?
It may seem crazy, but this something you could very possibly end up with if you have £100,000 of investments, which you aim to encash for a purpose, such as property purchase or retirement funding in 15 years time.
Would the revenue and customs really let you off of nearly £200,000 in tax? Can this really be done?
Well, yes, it can and using a little tool called Deemed Gains here is how.
Deemed Gains are a process where HMRC believe you are using a financial vehicle, such as a bond to generate large returns, but mask them so that the profits themselves can't be directly seen by the revenue.
To ensure that tax is being paid appropriately and in a timely fashion, HMRC therefore apply a deemed gain to any holdings which either contain or could contain offensive assets - such as stocks and shares.
Offensive assets are day-tradable holdings which could be used to create large profits, which are then hidden or rolled up in a product structure so that tax isn't paid on them.
HMRC can't see if you are holding these assets, so they simply assume that you are holding these and are hiding something from them.
To get around this 'problem', HMRC apply a deemed gain to the product you are holding, such a personalized portfolio bond. This is exactly as the name suggests, an annual gain which HMRC deem you have made in that financial year. As it stands, this gain is a flat 15% per annum. So if you're a UK tax resident, you can expect a tax bill based on a 15% profit of what your asset portfolio was worth at the start of that financial year. This isn't good news if you're only holding a collection of cash and low-yielding investments and probably isn't advisable if you are UK tax resident.
But what if you're offshore?
HMRC will still apply a deemed gain at 15% per annum, but while you're not financially resident in the UK, you can't be taxed by the UK government, so HMRC assume that you have been taxed on this 15% gain in the country you live in.
For most countries, this tax will be at 0%. So now you have the situation that you are actually deemed to have been taxed on that 15% profit. This means that if you have only made 5% when you return to the UK after 1 year, you've now got a credit of 10% which you can make in the value of your investments before you start being taxed on post-deemed-gain profits.
The longer you stay offshore, the more annual credits you build up and this is compounded annually. See the below table for how much credit you may earn over the years you remain offshore:
5 Years - 101.4%
10 Years - 304.5%
15 Years - 713.7%
So in theory, you can return to the UK after the end of your 15th year offshore, with a bond that you have grown in value from £100,000 up to £813,700 (713.7% + the initial £100,000 invested, which is not taxable) and you won't be liable to any tax on the profits under current legislation.
Alternatively, if you have not made this much profit, you may endorse the product to one which does not have the capability to hold offensive assets, so as to stop deemed gains being applied when you become UK resident then continue to make profit against the credits you accumulated while you were offshore.
£713,700 tax free money is better than a £199,836 tax bill right?
But what if you made a larger gain than the credit accrued under deemed gains?
Well, now HMRC will allow you to use some more tools called Time Apportionment Relief and Top Slicing to lessen your tax bill.
Please see the articles related to these for more details.
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