The following case study focuses on a familiar scenario and highlights the importance of international financial advice when moving to and from your home country.
A British client, aged 57, has worked in the UK oil industry for 25 years, and had moved to the Middle East with his employer.
He was on a salary of AED80,000 (£16,500, $21,800, €18,800) per month with the view to saving aggressively during his final three years before retiring.
The client is wealthy and has collected a portfolio of shares and funds over the years. These are held by stockbrokers and on numerous platforms, which he finds tiresome to manage.
A number of the shares were given to him from his employer as part of a bonus structure and now contain large capital gains, in which he has little record of original costs.
The client and his wife have two daughters in their early 20s, and are keen to start succession planning. They intend to retire in the UK meaning inheritance tax (IHT) would be payable on their worldwide assets.
During their five years overseas, the savings target is a capital amount of £600,000 ($791,000, €683,000). The client has a large defined benefit (DB) pension scheme in respect of his employment, which will cover the majority of his desired retirement income.
He is keen to reduce the possibilities of a lifetime allowance tax charge on the pension scheme.
The client and his wife have amassed a considerable estate in excess of £2m, and they are keen to start IHT planning to preserve wealth for their daughters, without prompting a tax charge.
As the clients are wealthy individuals, access to capital is not a major concern for the short term. It is something that may be required later in life when considering long-term care fees, however, as longevity is common in their family and both husband and wife have mothers that lived into their early 90s.
At the same time, being able to help their three grandchildren on to the property ladder is a priority, and ensuring the portfolio is positioned to allow this is important.
Benefits of a portfolio bond
An international portfolio bond was arranged with £200,000 that has been saved already, with the view of topping this up before the couple return to the UK.
Gross roll-up will benefit the client while overseas, and back in the UK, as they are likely to be higher-rate taxpayers throughout retirement because of the pension fund income. Deferring the tax on these benefits will help achieve the £600,000 savings target.
Five per cent tax-deferred withdrawals allow capital to be withdrawn without penalty over a minimum 20-year period and the client can use this to supplement income from the pension fund.
The client does not know how much income he will need on top of the DB pension scheme and there is no flexibility from this arrangement.
Being able to draw funds in a flexible manner can be achieved by deferring the 5% allowances while still in employment and then varying the withdrawals from the rolled-up years in the future, once repatriated.
How to achieve flexibility
To provide the capital for the grandchildren to buy houses, gift assignment can be used to reduce the potential tax liability on a withdrawal. The bond was set up with the maximum number of segments – 500 in this case – to allow the most flexibility.
When the grandchildren require capital, the segments should be assigned and surrendered in the grandchild’s own name because they are likely to be basic-rate taxpayers. They could also use the £1,000 personal savings allowance and 0% starting rate.
As the client will have further surplus funds to top up the bond before leaving the Middle East it is recommend he adds capital to the bond before returning to the UK.
He will benefit from time-apportionment relief and the contributions are deemed to be made at the start of the contract rather than the date of the top-up. This reduces future tax on withdrawals ahead of repatriation.
How to reduce tax liability
The client expects to be a higher-rate taxpayer in retirement and though chargeable gains from the bond are unlikely to push him into additional-rate tax, his wife may be charged higher-rate tax.
Top slicing relief can reduce the liability by assessing the gains accumulated since returning to the UK rather than the total gain being added to one year’s income.
The client is concerned about IHT over the long term but wishes to maintain control of the assets. We will consider trusts that can be wrapped around the investment in 2019 when the seven-year cumulation for a previous gift is outside of the estate.
Another of the client’s concerns is shares from his employer. With large capital gains present it is possible to transfer to the spouse.
The couple can then sell up to the annual exempt allowance each tax year to reduce the exposure to single company shares and invest in diversified assets within the portfolio bond.
As the couple intends to return to the UK in three years, capital gains tax would be payable on disposals while overseas because they will not meet the five-year non-residency period.
Enhancing lifetime allowance
As the employer is funding the pension scheme while he is overseas, an overseas enhancement to the lifetime allowance may be available.
This is because HM Revenue & Customs does not believe it is reasonable to test benefits that have not received tax relief against the lifetime allowance.
When the client retires we will be able to apply for an overseas enhancement to his lifetime allowance in respect of the time he has spent overseas.
This effectively means any scheme accrual during the couple’s time abroad will be awarded as an enhancement to the standard lifetime allowance.
Conduct regular reviews
Periodic reviews of the client’s repatriation plans must be completed and future legislation changes kept in mind.
As more wealth accumulates this can be added to the existing structure. It can be used in the early stages of IHT planning by transferring the existing structure into a trust.
Combining income tax, capital gains and IHT planning goes a long way to fulfilling the client’s financial needs.
Top 5 reality checks for retirement
By Rebecca Ellis, technical consultant, Guardian Wealth Management – providing technical support to financial planners on their multi-jurisdictional requirements.