You’ve left the UK, maybe for good, maybe just for a while. But wherever you’re based, you will want to invest to set yourself up for a more secure future.
So the key thing is to take advantage of the low tax environment. Even the taxation on savings plans can be beneficial.
Gains on a Hong Kong based savings plan won’t be subject to Hong Kong tax when you cash it in, or die. However, as someone who might be subject to UK tax now or in future, it helps to be aware of how the UK tax system could affect your plan.
|Residence||To put it simply, if you are in the UK for more than half of any one year, or for more than three months of the year, year on year, you will be treated as UK resident. Your UK residence status will determine if you need to pay UK income or Capital Gains Tax.|
Domicile is not about where you live at any one time. Where you are domiciled is where you consider your permanent home to be. You may live in Hong Kong for many years but still retain a UK domicile if you keep a property, citizenship or other strong links to the UK. Even if you have left the UK to permanently move to Hong Kong, you will be deemed to be UK domiciled for at least the first three years after you leave the UK.
For most people it will be quite obvious where they are resident and domiciled. However, if you are uncertain of your residence and domicile, it’s worth seeking professional advice. This area can be highly complex.
UK IHT can apply to you even if you’ve lived in Hong Kong for many years.
The first step is to work out whether Inheritance Tax is relevant to you. If you are non-UK domiciled you will only be subject to UK IHT on your UK situated assets. If you are UK domiciled, all your worldwide possessions and property minus your debts will be subject to UK Inheritance Tax. Your estate could be charged 40% tax on any amount over £325,000 (the current IHT threshold in 2012/13, known as the ‘nil rate band’)
Anything you leave to your spouse or civil partner is exempt from tax. But it’s worth noting this exemption is limited to £55,000 if your spouse is not UK domiciled. For example, if you are a UK expatriate and you are married
to someone who is domiciled in Hong Kong, you can’t assume that everything you leave to your spouse or civil partner is free from UK IHT. This is due to change with new rules in 2013, although the details are not yet available as at September 2012.
If your spouse doesn’t use their nil rate band on death, any unused amount can be transferred to you, giving you up to £650,000 to leave, for example, to your children, free from UK IHT.
The good news is that there are lots of steps that you can take to reduce the effect of IHT on your assets in general and your Hong Kong savings plan in particular.
The general rule is that the less your estate (your possessions and property on death) is worth, the less there is to tax. Maximising the use of exemptions by making IHT free gifts to your friends and family is a great way of reducing your estate. So if you can, start early and gift often.
Assets you give away up to seven years before you die may fall into the overall value of your estate for IHT. But there are some gifts that you can make that will be immediately outside your estate. These are called exempt gifts. There are a number of different ways that you can make these gifts to help reduce your estate value.
When we say ‘year’ below, we are referring to the UK tax year. This runs from 6 April to 5 April of the following year.
|Type of transfer||Exempt value|
Everyone can give £3,000 per year away using this exemption. You can carry it forward for one year only.
|£3,000 a year|
(£6,000 if you didn’t use it in the year before)
Small gift exemption
You can give small gifts to as many people as you like in any one tax year. You can give one small gift to each person. You can’t give more than £250 and claim that the first £250 is a small gift and you can’t combine it with your annual exemption as one gift.
|Up to £250 per year to each person|
Gifts on marriage
You won’t be charged IHT on certain gifts that you make when a family member or friend gets married.
|£5,000 from each parent £2,500 from each grandparent £1,000 from anyone else|
Normal Expenditure out of income
If you can prove that you have income you don’t need to maintain your current standard of living, you can make a regular gift of it as part of your normal expenditure.
|Varies, depending on your surplus income.|
You may be able to assign (gift) your Hong Kong savings plan to another individual, for example an adult child. It’s a straightforward way of getting the savings plan into the hands of the person you choose.
It might be possible to set up your savings plan under trust. This can also speed up getting money to your loved ones after you die, as the money can be paid directly to the trustees.
The value of your savings plan when it is transferred into a trust or to another person won’t be included in your estate if you live at least seven years after making the gift. And any future investment growth on your plan will be outside your estate.
If you’ve gifted your plan to a trust, some IHT may need to be paid when the trust is set up and when it is running. This depends on the type of trust used and the value of the investment. Your adviser can give you more details on this as it will be based on your individual circumstances.
The contributions you make to your savings plan, whether you’ve gifted it to someone or to a trust, may qualify as an exempt gift for IHT purposes. This will depend on the amount of contribution and other gifts you have made.
It’s always important to have a will that reflects your current wishes and circumstances. If you don’t have a will, your assets may not end up in the hands of your loved ones quite as you thought. There might even be a higher UK IHT bill. When you live abroad, the legal system may not be the same as the one you are used to. You may also end up with assets in other countries that are governed by other rules on your death. So you might need wills in different countries, and you need to be sure your wills all fit together. It’s particularly important that you make sure that your wills are up to date. Standard Life research shows that 61% of UK adults do not have a will drawn up. (Source : Standard Life Wills and Trusts Research Report 2012)
If you return to the UK, arranging your financial affairs to minimise UK income tax is an important part of planning.
The default position is that you are treated as resident or non-resident in the UK for a whole tax year. However, HM Revenue and Customs can allow you to ‘split’ a tax year. This can offer you a good opportunity to tidy up your tax affairs in Hong Kong and reduce the impact of UK tax on your finances, before your return.
If the split tax year treatment is granted, for example, if you move back to the UK on 6 June 2012, you would be treated as resident from June onwards, not from 6 April 2012 as would usually be the case. It is up to you to claim this treatment – HM Revenue & Customs won’t give it to you automatically. You are eligible if your home was abroad and you are returning to the UK for good, or for at least two years.
If you are UK tax resident your Hong Kong savings plan will be treated as a ‘foreign’ life plan. Gains you make on the savings plan, once you are back in the UK, may be subject to UK income tax. However you may be able to claim special UK tax reliefs which could reduce the amount of UK income tax paid, details of which are given later in this guide.
There may be withholding tax payable on certain investment funds. This is a tax that some countries deduct from dividends and interest payments to foreign investors. You can change funds within the savings plan without any tax consequences. There are no Hong Kong tax charges on you once you become a UK resident.
Generally, you’ll pay income tax on any gain you make on the savings plan when you take money out, or when the last person covered by the savings plan dies.
Any withdrawals will depend on what is allowed by your savings plan provider. In theory, for UK tax purposes, you could take up to 5% of the contributions you invested from the savings plan, without an immediate tax liability, each savings plan year. You can carry forward any unused part of your 5% allowance if you don’t use it.
If you want to make a withdrawal, it’s a good idea to consult your tax adviser. They can help you with the most tax-efficient way to take money from your savings plan. If your savings plan is segmented, cashing in those segments can sometimes lead to a lower tax bill.
If you are a non-taxpayer you can set your personal allowance against the gain. Then the rates are 10%, 20%, 40% or 50%. The rate of tax you pay depends on your income before and after the gain from the saving plan has been added to it.
Assignment can play a part here. If you gift your savings plan to someone, they will pay tax on
it at their own rate. So if you want to give your savings plan proceeds to someone, for example a spouse or adult child and they pay less tax than you, it can be sensible planning to assign it to them.
There are reliefs for people who have lived abroad and those who move to a higher tax bracket as a result of a life savings plan gain. Your legal or tax adviser can give your more information on these.
This relief takes account of the time you spent outside the UK, during which you owned the plan. Very broadly, you pay tax on a reduced gain from the savings plan. The gain is reduced by a fraction reflecting the time you spent abroad.
You are not taxed on the investment growth on the savings plan until the funds are withdrawn or the plan comes to end. This may distort your overall income tax position by taxing the whole gain in one tax year. Top slicing relief is a way of addressing this problem by finding your ‘average’ gain over the policy period and using this to determine the amount of tax you will pay at the 40% and 50% rates.
Top slicing relief is reduced by the time you spend as a non-UK resident.
You would report a gain on your life savings plan on your Self Assessment Tax Return. There are extra pages to add for foreign life policies (SA 106), and a helpsheet (HS 321) to help you work out any gains. You can find these at www.hmrc. gov.uk.
A guide like this can’t go through all the complexities that might come up in your individual circumstances.
A guide is available from HM Revenue and Customs called Residence, domicile and the remittance basis (HMRC6) which has a lot more information on the topics covered here. You can find it at www.hmrc.gov.uk.
Your legal or tax adviser can also help you. We’ve put together a reference guide that goes through these issues in depth. Contact your adviser if you’d like to know more.
Any links to websites, other than those belonging to Heng An Standard Life (Asia) Limited (“HASL”), are provided for general information purposes only. We accept no responsibility for the content of these websites, nor do we guarantee their availability.
Information provided in this guide does not constitute any form of advice and HASL is not responsible for any advice given on the basis of this guide. Any reference to legislation and tax is based on HASL's understanding of law and tax practice in Hong Kong and the UK at August 2012. These will be subject to change in the future. Tax rates and reliefs may be altered. The value of tax reliefs to the investor depends on their financial circumstances. No guarantees are given regarding the effectiveness of any arrangements entered into on the basis of these comments nor is HASL responsible for the completion of any tax returns on the basis of this guide. We recommend that investors seek advice from professional advisers regarding their own personal circumstances.
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Disclaimer: The above information is for reference only and should not be construed as legal, tax or investment advice. You should seek professional advice regarding your tax circumstances and the types of savings and/ or investment that are suitable for you. Investing in investment-linked assurance scheme involves investment risks. Past performance is not indicative of future performance.