Revenue changes qualifying rules for PPB
(12/3/2005)
The Inland Revenue has reduced the number of asset classes which can be held within a portfolio bond if it is to qualify for the ‘tax-free’ income facility for expatriates planning to return to the UK.
In the UK an amount equal to 5% of the investment made into a portfolio bond can be taken each year for a maximum of 20 years without incurring an immediate income tax liability. The ability to defer tax means that, with proper, well structured planning and timing, funds can be extracted in a tax efficient way via withdrawals.
This avoids the necessity of selling funds to obtain an income and, for those who have saved a substantial sum whilst working overseas, a portfolio bond can be used to provide a tax-free income in retirement or supplement their income when they return to the UK.
Under the new regulations, a portfolio bond will only be deemed qualify if it consists of open ended investment funds. This replaces the previous regulation that allowed investments with a fixed maturity date to be held with the bond and maintain its’ qualifying status.
Whilst the revised regulations limit further the holdings of a qualifying policy, portfolio bonds remain an excellent holding vehicle for those looking to hold a variety of asset classes in a tax efficient manner. Other benefits of a portfolio bond to lump sum investors include:
Tax Deferral
Because income and gains grow free of tax the policyholder can defer any tax liability on their capital until the benefits are taken. The ability to defer tax gives the investor the opportunity to decide when to pay tax, for example, people who intend to become resident in a country that does not tax investment bonds, or people whose income will fall or non tax payers who can offset gains against any unused personal allowances. In most countries bonds are considered non-income producing.
Investment Choice
Portfolio Bonds allow access to the world’s major currencies, to a range of world-wide funds and expert specialist fund managers with proven expertise. The greater the access, the greater the scope for successful investment. A bond offers the ability to restructure and change investment policy within the bond without changing investment vehicle
Additionally, bonds can generally obtain better discounts/terms from investment houses than an individual could on investment funds and we pass these on to our policyholders.
CGT Free Asset Switches
By actively managing a portfolio of funds the investor can switch between funds without incurring any tax liability. Normally any fund disposals incur a capital gains tax liability if funds are held directly depending on the country of residence.
Administration
Regular valuations keep the plan holder informed about the progress of the bond via a comprehensive statement detailing all transactions and funds held. For a high net worth client with numerous investments throughout the world centralising the assets under a bond wrapper may be attractive as on death this would only involve obtaining Manx Probate rather than probate in each country the assets are held in.
A professional administration service carrying out all transactions and involving the minimum amount of client time is available. Clearly for a wealthy investor this takes away all the time consuming hassle of paperwork.
Non-Residence Tax Relief
Any periods of non-residence will be relieved of income tax and on final encashment top-slicing relief may be used for any periods of UK residence if the tax payer is within the basic rate tax band. This may keep the taxpayer within the basic rate band and save 18% tax on any chargeable amounts.
CGT vs Income Tax
Until now, it has been a feature of UK tax law that individuals who made capital gains were not chargeable to UK CGT if the gain was realised while they were non-UK resident or ordinarily resident. Clause 127 Finance Act 1998 changes that position. Under the new rules, individuals who have been UK resident for at least four out of the previous seven tax years prior to the tax year of departure will continue to be liable to UK CGT on disposals they make whilst non-resident if they return to the UK within five years. The new rules apply to individuals who leave the UK after 17th March 1998, and apply to assets they held prior to their departure. If the individual is UK domiciled, the charge will be on worldwide assets.
An alternative and potentially much safer approach for such individuals would be to contribute to investments which are not subject to CGT i.e. offshore regular and single premium life assurance policies. They are fully portable, as the investor moves from jurisdiction to jurisdiction. In most countries, no tax charge arises until the benefits are taken. Under UK tax law the proceeds are subject to income tax, and thus not affected by the new CGT rules.
Candour Consultancy authorised introducers of portfolio bonds to the UK’s leading offshore financial services providers. Candour takes an individuals current and future personal circumstances into consideration when advising on the tax benefits of portfolio bonds and other tax efficient ‘investment wraps’.
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