If you've been reading about holding offshore bonds and lessening tax liability, then you may have heard of the terms Time Apportionment Relief and Top Slicing, but what are these and how can they be used to lessen your tax bill when you come to realize your gains?
Well, believe it or not, the UK revenue do actually play fair when it comes to taxing you on the gains you've made on your assets.
So lets assume you've held a portfolio bond, which you earned Deemed Gains credits on while you were offshore, but have now realized a profit which takes your slightly beyond your accrued credit.
In this example, an investor takes out a bond and invests £100,000. After three years, he endorses this to a UK friendly product to stop Deemed Gains being applied and at the end of the sixth year, he decides to surrender, or encash the bond.
During this time, the bond has made a 62.08% gain and is now worth £162,080; a gain of £62,080.
During the years that the investor spent offshore, the investor accrued Deemed Gains credits to the value of 52.08%, so £52,080 is deemed to have already been taxed, leaving only £10,000 to be inspected by the revenue.
But here is where customs actually do play fairly, they realise that this untaxed gain was made over 6 years, but the investor was only in the UK for 3 years as they can only tax the gains made while the investor was UK resident, they apply Time Apportionment Relief - 3 years in the UK divided by 6 years for the total gain means that only 50% is considered, so now the sum is halved to just £5,000 to be taxed.
That's not bad is it?
The revenue actually calculate this on a daily basis, so the calculation would have looked more like 1095 / 2190. If the investor had been offshore for 3 years and 1 week it would have been 1095 (2 years) - 7 (days) time spent in the UK, so 1088 / 2190, = 49.7%.
But what can we do about this £5,000 to be taxed? Well, the gains generated from a bond are treated as income, rather than as capital gains, so now we can apply Top Slicing to potentially further reduce the tax.
Top Slicing is where the income received, in this case £5,000 is split over the years that the client was UK resident - in the case 3 years, £1,666.67 a year. This is then applied to the client's normal income and taxed at the normal rate of income tax - either 0%, 20%, 40% or 50%, depending on the client's tax band for their normal income.
If the gain is small and doesn't push the client's income for that year up into a higher tax band for income then Top Slicing isn't neccessary, but what if you normally earn close to the limit for your band and then see a large gain such as £50,000 or £100,000 push you into the 40% or 50% tax band? Top slicing may, if over enough years reduce the total (annual) gain down and retain your current tax position for income.
So let's assume that our investor earns £34,400.
A £5,000 gain would take that income to £39,400, meaning that £2,000 over the tax band threshold would be taxed at 40% and the remaining £3,000 at 20%.
£3,000 x 20% = £600
£2,000 x 40% = £800
Tax Bill = £1,400
But because of Top Slicing, we can assign this £5,000 over three years, so the investors income was actually just £36,066.67 in each year, meaning he stays in the 20% tax band. So the new result looks like this:
£1,666.67 x 20% = £333.33
Multiply this by the 3 years the gains were made
Total Tax Bill = £1,000
The investor has now saved himself a further £400.
So through a combination of Deemed Gains, Time Apportionment Relief and Top Slicing, we have a final tax bill of £1,000, or a net profit of £61,080 (equivalent tax rate of 1.6%).
Holding these assets directly would have resulted in capital gains taxation.
Capital gains tax is also tested against income, but only in the year of encashment and is taxed at different rates to normal income tax.
The following example is the same investor, with the same annual income level, encashing his directly-held assets.
Annual tax-free personal allowance of £10,100 for Capital Gains Tax.
Gains: £62,080 - £10,100 = £51,980 to be treated for taxation purposes
Annual Income - £34,400 meaning £3,000 is available to use at the lower rate of capital gains tax.
£3,000 x 18% = £540
£48,980 x 28% = £13,714.40
Total Tax Bill = £14,254.40 (22.96%)
So through careful tax planning for the future our investor has saved himself £13,254.40 in tax.
You may even be able to save yourself more tax by assigning your bond or parts of it, if taking a partial surrender, to a lower-rate tax payer, such as a spouse or relative before encashment.
For more information on planning your assets for your future tax liabilities, contact a financial advisor.
Monday 20 February 2012
Sunday 19 February 2012
Using Deemed Gains to Your Advantage
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.
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.
Gross Roll-Up to Defer Tax
You may have heard of the term "Gross Roll-Up". But what does this mean to you?
How can you use it in your tax planning to defer or lessen tax liability on asset?
How does it all work?
Gross Roll-Up is a term applied to a structure, which enables you to buy and sell assets with no liability to tax on the gains at the time of disposal or re-investment.
How does this work?
Lets take a portfolio bond as an example.
Transfering your existing assets, such as cash, funds, stocks and many other assets to a portfolio bond creates an important shift in the way that ownership is defined.
Owning assets directly and disposing of these assets means that an immediate and direct profit or gain has been realized at the time of disposal, this is therefore taxed at capital gains tax rates.
Transferring your assets to a bond means that now you own the bond, and the bond owns the assets. This means that when an asset is sold or disposed of at your request, the bond has made a gain in its value, but you haven't actually realised that gain as you haven't sold or surrendered the bond itself. So no realized profits into your bank account, means no tax (for now).
In this way, gains are rolled-up. You can instruct the bond to buy and sell as many assets as you wish in order to make a profit and the bond just gains and gains in value, rather like a balloon being blown up and swelling in size.
But you're just deferring this tax until a later date right?
You've still, as an example, turned £100,000 into £250,000 and now need to be taxed on the £150,000 profit?
Well, yes and no. Portfolio bonds have a variety of ways in which they are treated differently for tax purposes and you can apply various tax credits to now lessen the liability that you have put off until the day you choose to surrender or partially surrender your bond.
To continue reading, see the articles on;
Deemed Gains
Moving Capital Gains to Income Tax and Assignment
Top Slicing and Time Apportionment
How can you use it in your tax planning to defer or lessen tax liability on asset?
How does it all work?
Gross Roll-Up is a term applied to a structure, which enables you to buy and sell assets with no liability to tax on the gains at the time of disposal or re-investment.
How does this work?
Lets take a portfolio bond as an example.
Transfering your existing assets, such as cash, funds, stocks and many other assets to a portfolio bond creates an important shift in the way that ownership is defined.
Owning assets directly and disposing of these assets means that an immediate and direct profit or gain has been realized at the time of disposal, this is therefore taxed at capital gains tax rates.
Transferring your assets to a bond means that now you own the bond, and the bond owns the assets. This means that when an asset is sold or disposed of at your request, the bond has made a gain in its value, but you haven't actually realised that gain as you haven't sold or surrendered the bond itself. So no realized profits into your bank account, means no tax (for now).
In this way, gains are rolled-up. You can instruct the bond to buy and sell as many assets as you wish in order to make a profit and the bond just gains and gains in value, rather like a balloon being blown up and swelling in size.
But you're just deferring this tax until a later date right?
You've still, as an example, turned £100,000 into £250,000 and now need to be taxed on the £150,000 profit?
Well, yes and no. Portfolio bonds have a variety of ways in which they are treated differently for tax purposes and you can apply various tax credits to now lessen the liability that you have put off until the day you choose to surrender or partially surrender your bond.
To continue reading, see the articles on;
Deemed Gains
Moving Capital Gains to Income Tax and Assignment
Top Slicing and Time Apportionment
What is Tax Planning?
They say in life, that only two things are guaranteed; Death and Taxes
Well, while the former may be out of your control, you actually can have a say in how the latter is dealt with.
Tax planning is about looking at your lifestyle aims, the assets you hold and how you deal with these. Then putting in place a plan or structure that will defer tax until a point you choose, lessen your liability, or even, with the right strategy, remove all liability to tax on your assets and any gains you may have made.
Tax agreements that your country of birth, or domicile may have with other countries and jurisdictions may mean that you are able to trade your assets in a protected environment, either through bond or trust structures that defer the tax payable now, and gain tax credits to be used against encashment later on.
Did you know that Her Majesties Revenue and Customs believe that certain asset structures are a way of masking high gains and as a result levy a 'Deemed Gain'.
This is HMRC's way of saying "we can't see how much money your investments are making, so we will just assume you are making high returns and then tax you on it".
Sounds unfair doesn't it? But actually, this can be used to your advantage.
How? Well, HMRC deem that you cash has appreciated in value by 15% every year. Of course, if you were living in the UK, this wouldn't be good, as you would receive a tax bill for capital gains tax on a profit that you may or may not have realised. A tax bill based on 15% when you've only made 5% would be a bitter pill to swallow.
BUT
If you live offshore and are resident in another country, HMRC can't tax you, so they deem that you have been taxed on the 15% profit, but at zero percent. This means that if you have only made 5%, you can now return to the UK the next financial year with your assets and make another 10% return tax free before you'd need to start paying tax on your gains (after all, you've already been taxed on it, but at 0%).
This can be used year after year after year, so if you're offshore for 5 years, you get 5x15% credit, which after annual compounding is a whopping 101.1%, less any actual gains seen in your asset value. The longer you stay offshore, the more credit you can accrue.
HMRC also give you a few more other tax toys to use to offset your tax liability. These will be covered in the next few blog entries.
You don't have to be British, but if you think you might end up in the UK one day, then you can start building up credits for later use.
Well, while the former may be out of your control, you actually can have a say in how the latter is dealt with.
Tax planning is about looking at your lifestyle aims, the assets you hold and how you deal with these. Then putting in place a plan or structure that will defer tax until a point you choose, lessen your liability, or even, with the right strategy, remove all liability to tax on your assets and any gains you may have made.
Tax agreements that your country of birth, or domicile may have with other countries and jurisdictions may mean that you are able to trade your assets in a protected environment, either through bond or trust structures that defer the tax payable now, and gain tax credits to be used against encashment later on.
Did you know that Her Majesties Revenue and Customs believe that certain asset structures are a way of masking high gains and as a result levy a 'Deemed Gain'.
This is HMRC's way of saying "we can't see how much money your investments are making, so we will just assume you are making high returns and then tax you on it".
Sounds unfair doesn't it? But actually, this can be used to your advantage.
How? Well, HMRC deem that you cash has appreciated in value by 15% every year. Of course, if you were living in the UK, this wouldn't be good, as you would receive a tax bill for capital gains tax on a profit that you may or may not have realised. A tax bill based on 15% when you've only made 5% would be a bitter pill to swallow.
BUT
If you live offshore and are resident in another country, HMRC can't tax you, so they deem that you have been taxed on the 15% profit, but at zero percent. This means that if you have only made 5%, you can now return to the UK the next financial year with your assets and make another 10% return tax free before you'd need to start paying tax on your gains (after all, you've already been taxed on it, but at 0%).
This can be used year after year after year, so if you're offshore for 5 years, you get 5x15% credit, which after annual compounding is a whopping 101.1%, less any actual gains seen in your asset value. The longer you stay offshore, the more credit you can accrue.
HMRC also give you a few more other tax toys to use to offset your tax liability. These will be covered in the next few blog entries.
You don't have to be British, but if you think you might end up in the UK one day, then you can start building up credits for later use.
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