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Home is where the CGT is

Harvey lives in the Middle East and is planning to retire in the UK

fairly shortly. He is over 65. He has a property in London which has

a substantial capital gain on it,along with a portfolio of offshore

funds that has also substantial accrued gains.

He is anxious to consider what might be done before returning to the

UK. What do you advise?

As far as the property is concerned, there are a couple of

alternatives. The first is to crystallise the gain by selling the

property before his return to the UK. Having been non-resident for

many years, there should not be a tax charge on any disposal.

In practice, though, it may be more sensible simply to maintain the

property as an investment. He has said he would want to keep some

sort of property for rental income and this has already proved to

have been a very good investment in itself.

The capital gains tax charge would be about £65,000 and it is

unlikely that the whole rigmarole of selling and buying a new place

would really be worthwhile. For one thing, the stamp duty on the

purchase of a new property could be over £20,000 if the new one

were to be more than £500,000 in value.

This property will remain an attractive investment, providing a

decent stream of income until he dies. He has no dependants and his

estate will be passed entirely to charity. This means there will be

neither an inheritance tax nor capital gains tax charge on the

property when he dies.

We have also looked at trusts and property companies but, on balance,

it is worthwhile simply hanging on to the property as there is no

real reason to dispose of it.

As far as the portfolio is concerned, we have considered using an

offshore capital redemption bond – a single-premium policy written in

the Isle of Man. Transferring the assets into the bond constitutes a

disposal and a rebasing for capital gains tax purposes. This will

deal with the existing gains. There will be no capital gains tax on

disposals of assets within the bond and income tax can also be

deferred, depending on the assets.

As this is a capital redemption bond, the policy can be established

on a non-life insurance basis, so there is no need for any lives to

be assured. This would greatly simplify the administration of the

vehicle and means there is no automatic chargeable event on his

death. The policy will remain in force so that it can be passed

intact as an asset, rather than being forced to mature.

Current rules limit the investments but Harvey can continue to have a

portfolio of cash funds, unit trusts, investment trusts and offshore

funds, including hedge funds, within the bond with no immediate

liability to tax.

We could, therefore, use a bond to build a portfolio using cash,

fixed interest, low-risk funds and direct funds to produce a balanced

return of income and capital growth, while minimising the immediate

tax liability.

In principle, he could draw an income of 5 per cent of the initial

value of the bond for 20 years. After that, any withdrawals would be

taxed as chargeable events but even this liability could be

minimised. However, he will probably not need the full 5 per cent

because of the use of other assets held in his own name.

As there is no charge to capital gains tax within the bond, Harvey

will aim to use his annual exemptions through assets held directly

himself, such as zero-dividend preference shares that would again

provide income with no tax charge.

His property and pension income will take him close to the threshold

for higher-rate tax. Using the facility for drawing capital out of

the bond without any immediate liability, coupled with the taking of

profits on the other assets within his annual exemption, it will be

possible to keep him a basic-rate taxpayer.

It is important to remember that the tax liability is only deferred

and, should there be a chargeable event (surrender, death or excess

withdrawal), tax will be chargeable at his highest rate.

Ultimately, however, the aim will be to pass the portfolio to charity

so the final liability can be removed altogether.

The overall aim would be to use capital growth as well as true income

for a balanced long-term return – the use of the bond will facilitate

long-term tax-efficiency for the whole portfolio.

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