View more on these topics

Brown’s foreign aid

Taxation: Simon Hildrey says there were some welcome benefits for overseas property investors in the Chancellor’s final Budget.

It is not often that offshore investors have had reason to toast Gordon Brown during his 10 years as Chancellor. This year, for a change, there were two reasons to thank him after the Budget but there was also a sting in the tail for some investors.

First the good news. For investors in overseas property there is a welcome change in treatment for income tax in some situations.

It is estimated that more than a million people in the UK own properties in Europe or further afield and in many cases, these investors have bought shares in a company that owns the overseas property.

There are a number of reasons why investors hold their property in a company. For example, it has been used to avoid the impact of forced heirship in civil law countries such as France.

Under the forced heirship rules, on death a part of an investor’s estate may automatically pass to his or her children, even where there is a will, which can have knock-on tax consequences in their country of residence.

Smith & Williamson national tax director Richard Mannion says there are other reasons to buy property through a company. People buying US properties are advised to use a company to protect themselves against claims from visitors who fall over, hurt themselves and sue for damages.

In Bulgaria, adds Mannion, it is not possible for a non-resident to own land, so investors have bought shares in a Bulgarian company that owns the land.

The owners of such companies have been charged UK income tax as a benefit in kind. But Brown announced in the Budget that such income tax liabilities will no longer apply as long as certain conditions are met.

Macfarlanes partner and solicitor Jonathan Conder said these conditions are that the “company is owned by one or more individuals, the company’s only activities are owning the property (and any incidental activities), the property is the company’s sole or main asset and the property is not funded directly or indirectly by a connected company”.

HMRC will no longer pursue liabilities and lawyers say the rules are retrospective. This means investors who have paid benefit in kind charges will be able to reclaim the tax they have paid. The exemption, however, only applies to non-UK residential property. Homes in the UK held through companies may still be subject to benefit in kind liabilities.

More good news for offshore investors was announced two days after the Budget. This is the guidance issued by HMRC that bare or absolute trusts set up for minor children will not be treated as chargeable lifetime transfers.

This means they are not subject to the new tax regime for trusts in which transfers above the nil-rate band are subject to a 20 per cent charge and a 6 per cent charge every 10 years.

The announcement has confirmed what lawyers and insurance companies had said before HMRC revealed it had received contrary legal advice. This is that bare trusts are effectively an outright gift and therefore are regarded as potentially exempt transfers. As much capital as a settlor wants can be transferred into a bare trust and it will be exempt from inheritance tax if the settlor lives for another seven years.

“HMRC’s letter confirms it accepts that bare or absolute trusts for minors should be treated in the same way as those for adults,” says John Riches, deputy chairman of the Society of Trust and Estate Practitioners.

“This is wholly consistent with the treatment of such arrangements for capital gains and income tax.”

Also in the Budget was the announcement that the taxation of overseas dividends for individuals is to be aligned with the taxation of UK dividends.

Conder says: “A basic-rate taxpayer will have no tax liability on the overseas dividend and a higher-rate taxpayer will pay an effective rate of 25 per cent.

“The simplification will only apply if the taxpayer owns less than 10 per cent of the shares and all overseas dividends in the year received by the taxpayer total less than £5,000.

“The maximum tax saving for a higher rate taxpayer is therefore £625. The Treasury, however, is considering whether these charges should apply to all overseas dividends without limit.”

As expected, however, the government has clamped down on the use of schemes by which investors have gained growth free of tax through offshore insurance bonds.

An example of such a scheme is where an investor places £100,000 in an offshore bond.

The bond retains £95,000 with 5 per cent taken for the initial commission. The adviser will typically rebate 4 per cent, or £4,000, to the investor.

Insurers have argued that HMRC’s statement of practice SP4/97 states that commission rebates are tax-free.

Clients usually hold their offshore bond for between 12 and 15 months. The bond, which typically invests in cash, may have grown to £101,000 at the end of this period. The tax is calculated on the growth from the original premium, which in this case was £100,000.

The investor, therefore, pays tax on £1,000 in this example but receives £105,000, which includes £4,000 growth tax-free.

But for policies bought on or after March 21, 2007 or where additional premiums are made to existing policies, now only the net premium will be taken into account when calculating how much tax has to be paid when the policy is cashed in.

The new rules will apply if premiums are above £100,000 and the policy is cashed in before the end of the third tax year after the payment of the premium. This applies to all policies and not just those involved in this scheme.

Aegon Scottish Equitable International technical manager, Margaret Jago, says: “If an investor pays a premium of £100,000 but the adviser rebates commission of £5,000 and the bond is encashed within three years, the premium deducted from the proceeds can be treated as £95,000 not £100,000. This increases the taxable gain on the bond by £5,000.”

This prevents investors gaining the tax-free growth but Aegon Scottish Equitable International head of marketing Steve Whalley says some investors may still undertake the scheme by holding their policy for three years to gain the tax-free growth.

He adds it can be argued the Budget announcement has made such schemes legitimate.

“HMRC, however, has reserved the right to extend the period beyond three years,” says Whalley.


Off the Mark

Poor Aegon PR Mark Locke. After bragging to his wife and anyone who would listen that three female MM reporters planned to undress in his hotel room, he was disappointed to hear that they changed into their frocks for the MM awards in colleague Margaret Robertson’s room.The porter, however, was not disappointed when he came […]

Gigi Chan to target Chinese mid caps

Threadneedle is setting up a China opportunities fund to be managed by Gigi Chan.It will focus on the investment themes of domestic consumption, urbanisation and infrastructure spending, taking a bottom-up approach to stockpicking. Jan de Bruijn will be deputy fund manager.The portfolio will sit alongside Threadneedle’s £2bn portfolio of Far East and Asia equity funds […]

Child’s play for SVM

Edinburgh-based SVM Asset Management has made two of its investment trusts available through a savings scheme for children.


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm