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
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.