Expat Advice Centre

Expat Advice Centre To provide the highest level financial advice in a friendly & professional manner. Aim to increase knowledge of why future planning must be a priority

28/05/2015

Retirement – more than just a pension

With the new UK pension freedoms, saving for retirement has become prominent in people’s minds, giving more control over retirement income and removal of one of the main barriers to pension savings.

Rachael Griffin | Retirement income planning | 22 May 2015
These changes create an advice opportunity but, as our research* shows, retirement planning is about more than just a pension. People are sourcing income from a number of other investments, including their house and part time work, to fund additional income. It is therefore becoming increasingly important to take a holistic approach when looking at someone’s long-term savings needs.

So, let’s look at each of these advice opportunities:

IHT and estate planning
Pensions generally sit outside of someone’s estate for inheritance tax (IHT) purposes, but new pension changes mean more money can be passed on to beneficiaries in a tax efficient way. If someone dies before age 75, there is no tax to pay by their beneficiaries on any of the pension proceeds within the deceased member’s Lifetime Allowance, regardless of whether they have started to access their pension. If they die post 75, the value passed to beneficiaries, whether as a lump sum or as a pension income, will be subject to the marginal rate of income tax on the monies they receive.

These new rules make it even more attractive for people to hold as much as they can within their pension pot for as long as they can. If someone has a large estate for example, selling some assets and moving the proceeds into the pension (within their annual allowance) could mean the overall estate is made more IHT effective.

According to our research** nearly two thirds of those approaching retirement are unaware of the changes in the tax treatment of pension death benefits. This creates a clear opportunity to help clients arrange their finances in a more tax efficient way, ensuring greater potential wealth is passed on to beneficiaries in a way suited to their needs, and no one is hit with an unnecessary IHT bill.

Accessing income in retirement
The new pension freedoms may encourage people to access their pension money without due consideration to the impact this will have on their estate as a whole, let alone the income tax they may need to pay on the proceeds. Advisers will play a key role in helping clients achieve their income needs in the most efficient way possible.

For example, it might make more sense for clients to utilise other sources of income before they access their pension. Drawing a tax-free income from an ISA, or using the 5% tax-free withdrawal allowance from a Bond could be more efficient than drawing income from a pension. It could be more beneficial to leave the pension pot until last, leaving as much as possible inside the pension to be passed on, potentially tax-free, to beneficiaries.

Accessing the tax-free cash within a pension is a great source of tax efficient income. However, it will then form part of the client’s estate for inheritance tax purposes so it depends on which need is more important for the client. If IHT was a primary driver for the client, then they could use their tax-free cash as a way of sourcing their annual gift allowances (which are exempt from IHT) such as £3,000 per donor per year (which can be carried forward from the previous tax year).

Lifetime Allowance
The Lifetime Allowance (LTA) on pensions is currently £1.25 million, but under the UK Government’s March 2015 Budget announcements, that figure is set to reduce to £1m from 6 April 2016, increasing annually from April 2018 in line with consumer price inflation. The £1m LTA takes into account both contributions and investment growth, so if a client’s investments perform well, it is not inconceivable that this limit could become a potential issue for them.

Many wealthier clients with pension savings approaching £1.25m will need advice on how to continue to save tax efficiently. Advisers will be able to assess whether some form of protection is required or whether a transfer to a Qualifying Registered Overseas Pension Scheme (QROPS) is beneficial.

QROPS continues to be attractive for people who are emigrating from the UK and wish to take their pension savings with them. There can be advantages for those who would be at risk of reaching the £1m LTA if their benefits remained in a registered pension scheme. Once funds are held in a QROPS, they can grow above the LTA limit in the future, without this growth being subject to the 55% LTA excess tax rate.

Interesting times ahead as the advice landscape evolves
It is undoubtedly an interesting time in financial services – history is in the making. Now that clients have greater responsibility and control over their wealth, we are all poised to help ensure they make the right decisions.

The increased use of other financial products to provide an income in retirement, thereby preserving the pension as an IHT vehicle, is an interesting consequence of the pension reforms. The way people think about their pensions and long-term savings will evolve over time and behaviours may change.

For example, if the tax relief on pensions were ever to disappear, or be reduced, the greatest benefit a pension would have is the ability to pass wealth on to future generations in a tax efficient way.

Arguably the same result could be achieved from an offshore bond, where any growth on the investment builds tax-efficiently, can provide 5% tax-free withdrawals in retirement, and with the right trust arrangements in place, the proceeds of the bond can be passed on tax efficiently to beneficiaries. We could even see offshore bonds emerge as the best kept retirement secret.

* Source: Old Mutual Wealth Retirement Income Uncovered report – Dec 2014.
** Source: Research by YouGov and Old Mutual Wealth, total sample size was 1023 adults, survey was undertaken between 11/03/2015 – 17/03/2015.

29/04/2015

New Capital Gains Tax Rules for property holding Expats

New Capital Gains Tax rules affecting British expats and non-UK residents with UK property
The UK tax loophole which allowed overseas investors and British Expats to avoid Capital Gains Tax (CGT) on the sale of residential property is now closed.

The new rule, which came into effect on April 6, 2015, will particularly affect British Expats and non-UK residents with UK property, especially those with buy-to-let agreements which generate an income. This new rule will mean that the sale of a UK property, which currently attracts no UK capital gains tax could incur a UK capital gains tax bill in the region of 28% on any gains made after April 6th 2015, depending on your personal circumstances.

It is recommended that people who own UK property arrange for any properties to be ‘officially’ valued (either by estate agent or property surveyor) as soon as possible to establish an accurate understanding of any gains which have subsequently been made.

If you are a non-UK resident, or expat, with a UK property it is important that you understand the new Capital Gains Tax Rules and the full array of options which could reduce your exposure to all types of UK and international taxation – now and in the future.

UK Capital Gains Tax rules for British expats
It used to be the case that by simply leaving the UK for a complete tax year, and then disposing of any profitable assets (property, shares etc.) during that year could relieve you of the burden of Capital Gains Tax.

However, one year is no longer a sufficient length of time. An individual now has to be non-resident for a minimum of five complete UK tax years to take advantage of this rule. Proper planning is clearly very important in these situations as a few months miss calculation here or there can make a significant difference in your tax liability.

Sometimes it may even be worth taking an extended holiday rather than risk coming back to the UK too soon, when significant asset sales have occurred.

Even though you may be deemed non-resident for income tax purposes, you are treated as temporarily non-resident for capital gains tax purposes for up to 5 years. Certain gains made during that time are taxed in the year you return to the UK if within five years.

If, however, the asset was acquired after you had left the UK, then the gains are not subject to UK Capital Gains Tax. When double taxation agreements are taken into account, capital gains may be completely exempt from UK tax but taxable in your host country. As such there is still room for planning where the host country charges a lower rate than the UK.

Capital Gains Tax reliefs
There are several different tax reliefs which can reduce the chargeable gain:

– Rollover/holdover relief on replacement of business assets – allowing you to defer the CGT on a gain of a business asset where this is matched with a replacement of a new business asset in the period commencing one year before and ending three years after the disposal.
– Business incorporation relief – available when you transfer your business into a Limited Company in exchange for shares.
– Holdover gift relief – on some gifts of business assets, or gifts made into trusts mean the tax does not become payable until the person, or trustee who receives the gift disposes of it.
– Entrepreneurs’ relief – for disposals after 5th April 2008. This allows disposal of a material part or all of your business to have the CGT rate reduced to 10%. – There is a lifetime limit which from 6 April 2011 is £10million.

Absorption of capital losses
Any capital losses made on a chargeable transaction are netted off against any capital gains made in the same tax year. They are applied before the annual exemption. Unused capital losses are carried forward against future capital gains; they cannot normally be carried back. To make use of a capital loss it must be reported to HMRC within five years and ten months of the end of the tax year in which it arose.

Capital gains tax allowance
An annual exemption of £11,000 for 2014/15 is available to individuals so total gains made in the tax year up to this amount are exempt. Any unused annual exemption is lost and cannot be carried forward or transferred to another person.

In 201/16 the capital gains tax annual exemption rises to £11,100.

Other Exemptions
– Normally the sale of your only or main residence is exempt, although it can become partly chargeable in some circumstances such as if it is let out or used for business purposes;
– Transfers of assets between husband and wife or civil partners. Such transfers are normally treated as being made at no gain/no loss;
– Most chattels whose value decreases over time (called wasting assets);
– Non wasting and business chattels where acquisition cost and disposal proceeds do not exceed £6000;
– Certain private motor cars;
– Gifts to charity and certain amateur sports clubs;
– SAYE contracts, savings certificates and premium bonds;
– Betting winnings and prizes including the lottery;
– Compensation for damages for personal or professional injury;
– Some compensation pay-outs for miss-sold pensions;
– Life assurance policies in the hands of the original owner or beneficiaries;
– Company reorganisations and takeovers where there is a share for share exchange.

24/11/2014

A recent study has highlighted some of the often overlooked hidden financial challenges for expatriates moving to the United Arab Emirates.

According to the study, conducted by the Economist Intelligence Unit (EIU) on behalf of Friends Provident International, while certain costs of living in Dubai and Abu Dhabi are significantly lower than in other major cities, these overlook the much higher costs which can been accrued in other areas.

For example, according to the EIU’s Worldwide Cost of Living Survey, which is based on a basket of goods and services, and tracks over 50,000 key prices in over 130 cities around the world, prices in Abu Dhabi and Dubai are 38% and 42% respectively less than Sydney, Australia.

The gap is less pronounced but still significant for London (35% and 37%) and New York (27% and 30%).

However, FPI points out the EIU index does not include the cost of property and education, which many expatriates in the UAE find the most significant cost of living challenges.

Marcus Gent, managing director, Middle East and Rest of the World at FPI said: “Having recently moved to the UAE from the United Kingdom I can relate to the findings outlined in the paper. A tax-free income is without doubt one of the key benefits of living and working here.

“However, property rental prices in some areas of Dubai have risen 60% over the last 12 months and some schools are proposing an increase in education fees of up to seven per cent this year.

“A lot of expatriates seem to fritter away the savings they make in tax, rather than make the most of the great opportunity they have to save. With some careful financial planning and disciplined saving, the cost of a quality education and buying a property can be mitigated to a large extent.”

Adam Green of the Economist Intelligence Unit, and editor of the paper said: “While the UAE does still offer high salary packages and zero income tax, expats should not assume they are going to simply pocket the difference of the tax break, with everything else staying equal.”
Pricier accommodation

FPI explained that although top end accommodation prices in the UAE compare favourably with the likes of London and New York, they sit atop a very different – and more polarised – market. In the UAE, there is a dearth of mid-range properties, effectively forcing many expats to take pricier accommodation than they otherwise would.

Coupled with the rise in accommodation prices, the rising cost of education has also made some expatriates currently living in the UAE reconsider how long they will stay in the country.

School fees tend to increase dramatically at secondary school level – driven mostly by the salaries needed to attract the quality of teachers required. Accordingly some expatriate families plan their UAE stay, and set career goals, in five- or 10-year periods to coincide with a move home, or to another country, when their children reach secondary school age.

FPI’s conclusions are corroborated by Insight Discovery’s fifth annual Middle Eastern Investment Panorama report, released last week, which found that financial advisers based in the UAE increasingly see the rising cost of living in “as a major challenge as it reduces the ability of their clients to save from their regular income”.

Insight Discovery said of those surveyed, 74% ranked rising cost of livening as a threat, with only 24% seeing this as an opportunity to give advice. However, the report did highlight Bahrain as an exception where living costs are roughly half of those in Doha and Dubai. Advisers there saw this as an opportunity to capture business from other regional centres

11/11/2014

Among the villains of modern life, buy-to-let investors feature somewhere between people who text while they’re eating and dog-walkers who leave bags of poo dangling from trees. If you are in the business yourself you may consider the accusation of pricing the young out of the housing market to be unfair, preferring to see what you do as providing a quality service for tenants that’s unrecognisable from the days when Rachman ruled the trade. But leaving aside the rights and wrongs, are there still good returns to be made, or are buy-to-letters about to get their comeuppance?

Compared with their counterparts in the bombed-out markets of Spain and Ireland, British property investors had a good downturn. The slump did not expose an excess of housing but, by reducing construction, intensified a shortage. While prices fell up to 30 per cent, rents rose and interest rates fell. Latterly, values have recovered and are now 26 per cent above their 2009 nadir, says Nationwide. In London they are 65 per cent higher. But the outlook is less friendly, with a chorus warning that house prices may have peaked. Capital growth matters in the buy-to-let market because rental yields have for some years been poor. No one much cares about this when the value of their property is rising at 17 per cent a year, as it has been in London, but if prices are static or falling, what then?

Even yields which sound initially enticing can turn out disappointing once the costs of upkeep have been subtracted. When your Cash Isa says it offers 1.5 per cent, 1.5 per cent is what you get. If your property promises a gross yield of 4 per cent, on the other hand, you’ll be lucky to end up with half that. Even in London, rental properties spend about one week in ten empty, awaiting new tenants. Over time that will reduce your gross yield to about 3.6 per cent. If you let through agents who charge up to 15 per cent plus VAT for a full service, your yield may dip below 3 per cent. Then comes maintenance — and for most flats, service charges and ground rents. These can easily account for 1 per cent annually of the capital value of your property, reducing your net yield below 2 per cent — back in savings-account territory and significantly lower than the return on the FTSE 100.

08/05/2014

Most people do not expect their retirement income to be as good as their parent's, the survey from Towers Watson found.

10/04/2014

When saving for 10 years pays more than saving for 40
Save from 21 to 30, then stop. You will have a bigger pension than a saver who starts at 30 and stop at 70. The miracle of compound interest, Einstein's 'eighth wonder of the world’
Albert Einstein
Adds up: Albert Einstein took the long view Photo: AP
Richard Evans

By Richard Evans

7:34AM BST 07 Apr 2014

Comments345 Comments

Which will give you a bigger pension: saving for 40 years or just 10?

Believe it or not, the answer is 10 – if those years are at the very beginning of your working life.

Someone who starts saving at the age of 21 and then stops at 30 will end up with a bigger pension pot than a saver who starts at 30 and puts money aside for the next 40 years until retiring at 70.

This astonishing outcome is entirely due to the power of compound interest – the way that investment returns themselves generate future gains. Having 10 extra years for compound interest to work its magic has the same result as all those years of extra contributions.

• How to invest like ... George Soros
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The conclusion emerges from figures calculated by CLSA, a research company, and assumes investment growth of 7pc a year.

The company looked at savers who each contributed £2,500 a year to a pension.

The first, who started saving at 21 and stopped at 30, would have a pension fund worth £553,000 by the age of 70. This assumes that no further contributions were made but that the fund carried on growing at 7pc a year, with these gains reinvested in the pension.

The second saver, who starts at 31 and carries on contributing until the age of 70, ends up with a fund worth £534,000, again assuming 7pc annual growth.

The total contributions of the early-bird saver come to £25,000 and grow by a factor of 22. The late starter will pay a total of £100,000 into the fund and see his or her money grow a little more than fivefold.

A third scenario is perhaps even more startling.

Some parents begin a pension or other savings plan for children as soon as they are born, sometimes to benefit from the tax relief on up to £2,880 that is available to everyone, even babies. If your parents pay £2,500 a year into a pension for only the first two years of your life – a total of just £5,000 – and the money then remains invested, growing at 7pc a year with compound interest until you are 70, a fund worth £551,000 will be the result.

Another simple illustration of the unexpected effects of compound interest is to ask how long it takes to double your money if you make compounded returns of 10pc a year. The intuitive answer is “10 years” but it actually takes just seven. In fact, to double your money in 10 years requires a compound return of only 7pc a year.

Terry Smith, the manager of the Fundsmith Equity fund, which aims to invest in businesses that use the compounding effect on their own profits, pointed out the effect of a seemingly small improvement in returns on the final value of a savings plan if compound interest were allowed to work over a long period.

He asked: “Starting with £10,000, what is the difference in final capital from 30 years of investment at 10pc a year compound versus 30 years at 12.5pc a year ? The answer, rather surprisingly, is that the extra 2.5pc of compound return would double the final sum – so £10,000 invested would become £342,000 at 12.5pc as opposed to £175,000 at 10pc.”

Albert Einstein called compound interest the “eighth wonder of the world”, adding: “He who understands it earns it; he who doesn’t pays it.”

Darius McDermott of Chelsea Financial Services, the investment shop, said: “The lesson from all these figures is that there is no amount too small to start investing and that starting early gives you a huge advantage.

“But they also show how crucial it is to stay fully invested and to keep reinvesting any interest.” He said investors who pulled their money out in 2008 when the financial crisis began would have missed out on the rally in the markets over the six years since. “If you’re investing for the long term, it is important that you hold your nerve when the market is struggling and continue investing,” Mr McDermott said.

“It’s very hard to get rich quickly but it’s quite possible to get rich if you keep reinvesting and you have time on your side.”

06/04/2014

The desperate tactics being used to avoid inheritance tax
With the inheritance tax threshold frozen, families are resorting to more desperate measures to avoid death duty
David Cameron has said he wants to raise the IHT threshold from its current £325,000 per person to £1m
Richard Dyson

By Richard Dyson

7:12AM BST 06 Apr 2014

Comments6 Comments

Ask any reputable financial adviser what most worries their clients and inheritance tax (IHT) is near or at the top of the list – and causing more anxiety by the day.

“With shares and property prices rising as they are, our clients can’t give away assets fast enough,” said one financial planner, serving a mainly rural clientele in the Midlands. “We see them one year and they make appropriate gifts to their children, but when we see them the next year their property and shares have risen by 10pc and the situation is as it was before.”

David Cameron has said he wants to raise the threshold from its current £325,000 per person to £1m, but without saying when or how. Not raising it from its current level would mean that the proportion of estates falling within the scope of the tax would rise from less than 3pc in 2010 to 10pc in 2018. And the sums raised? According to a paper published last week by the Institute for Fiscal Studies, if the threshold remains the same, more death tax will be paid as a proportion of all tax income by 2018 than at any point since the Seventies.

Facing an IHT liability is not life’s most pressing problem, perhaps, but inheritance tax is so loathed that families are going to eve greater lengths to avoid it – sometimes successfully and sometimes, as explained below, with less welcome consequences.

The rush to give away homes and other assets
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Extremely wealthy families – those with assets worth many millions – are usually less affected by inheritance tax, said tax expert Julia Rosenbloom of Smith & Williamson, the accountancy firm.

Because their assets come in many forms – properties, businesses and shares – they can be more effectively arranged to cut the bill.

“But the problem is more with the ‘mass affluent’,” said Ms Rosenbloom. These were the “ordinarily well-off”, she said, perhaps with a home worth £1m and a further £500,000 elsewhere. “If your major asset is your home, as it is for most, you really are limited in your options.”

The threshold above which the 40pc tax applies is now £325,000 for individuals or, with their allowances combined, £650,000 for married couples. With average property prices in many southern areas already higher than this and rising, the pressure is on.

This has encouraged many to downsize and give away cash, or simply give the property directly to heirs. For this to successfully remove the property from the donor’s estate, they will need to survive seven years after making the gift. Until the seven years are up, the gift is only “potentially exempt”, and IHT will apply.

If the donor continues to live in the property, he or she must pay a market rent to the new owner, otherwise the gift falls foul of the “gifts with reservation” rules and could still attract tax.

Many families are giving their homes to their children – often ill-advisedly. Mike Warburton of Grant Thornton, another accountancy firm, said: “I came across one case where a woman thought it wise to give her home to her daughters while continuing to live in it. She didn’t pay any rent, however, so on her death the house was still subject to inheritance tax under the gifts with reservation rule. Worse, the two daughters, when they sold the property, had to pay capital gains tax on it as well – because it was not the primary residence of either.” The bungled manoeuvre had failed on the IHT front and incurred unnecessary additional taxes.

In the past, complex schemes have been devised where people borrow money against a property and put it in a trust, effectively outside their estate for tax purposes. But tightening of the taxman’s “anti-avoidance” powers has made these arrangements unlikely to succeed.

The children who give their inheritance back to their parents

This curious situation is most likely to arise when, as now, the value of property, shares and other assets is climbing.

It relies on a “deed of variation”, where the beneficiaries of a will can elect to have the money passed on immediately to other parties. This is commonly used when, for instance, an already well-off, elderly widow inherits money. The writing of such a deed allows the money to pass straight to her own will’s beneficiaries, or anyone else. The money is never part of her estate, and so doesn’t add to her own liabilities.

But deeds can be used in other ways. Often when one spouse dies, while most of their estate may go to their husband or wife, some assets are bequeathed to their children. If these include property or shares they could have increased in value since the last review of the will, to the extent that they exceed the threshold.

If so, the recipients can construct a deed to have their inheritance, above the value of the threshold, returned to their mother (or whichever is the surviving parent), where no tax is payable. She can then start giving the assets back to the children, as per her late husband’s original will, in the hope she survives a further seven years.

The wealthy elderly who marry younger members of their family

Distasteful though it may seem – and there is no evidence anyone has yet done this – it would be possible to bequeath any size of estate to your child, tax-free, if you were to marry their partner. Civil partnership and same-s*x marriage legislation makes this even easier, as the donor can marry either s*x. A wealthy, elderly man, for example, could technically marry the father of his daughter’s children (provided that this other man and his daughter were not married themselves). This would enable an estate of any size to pass tax-free into the next generation on the older man’s death. After his elderly “husband” had died, of course, the younger man would be free to marry the daughter, with the estate thus secured intact.

That is a hypothetical extreme in which the risks are clear. But similar, less outrageous strategies are practised in real life. A tax adviser told The Sunday Telegraph of a very wealthy client aged 89, whose wife was dead. On learning of the limited time in which to minimise his liability, the client married his cousin, 10 years younger, to whom he was very close. He died three years later but she lived on for considerably more than seven years, allowing enough time for the assets to be distributed according to his wishes, free of tax, to his children and other younger members of his family.

The rush to Aim shares

Since August 2013 shares quoted on London’s Aim market – generally for smaller, riskier companies – have been eligible to be held in an Isa. Better still, as Aim shares can be bequeathed free of IHT (if they have been owned for two years or longer), savers have the means to bequeath their Isas tax-free.

The change sent a flood of money into Aim shares, many of which bounced as a result.

Mark Williams is the IHT expert at Octopus, a fund manager, overseeing portfolios used to avoid IHT. He said: “Many people have very large sums inside their Isas but to bequeath the money tax-free they have to remove it from the Isa, give it to their beneficiaries and then live seven years.”

Switching to Aim shares, or portfolios of Aim shares, means the money remains within the Isa wrapper – attracting no capital gains tax or further income tax – and can be passed on efficiently. “It means the investor controls the money until their death, which is a relief for those worried about care costs, for instance,” said Mr Williams.

But there are risks. Aim shares are volatile and do not tend to yield as much income as other assets. Taking more risk later in life is not what many savers would choose to do.

The rush to farmland

Agricultural land is free of inheritance tax – largely to enable landowners and farmers to keep their businesses within the family – but in recent years this has attracted a wider range of investors, simply using land as a means of passing on assets. Ian Bailey of Savills, the property group, said: “IHT is a significant factor in demand for farmland. It is probably the only real estate you can pass on free of tax.”

This partly explains the rise in farmland values of 14pc a year over the past decade. Savills predicts this growth to continue, but more slowly, at a rate of 6pc a year for the next five.

But farmland is not an easy tax-busting option: to benefit from the full IHT relief the land needs to be farmed.

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