In this real-life scenario, the focus is on a typical expat family circumstance in order to highlight how important cross-border investment, taxation and trust planning expertise has become.
The scenario
A man of African origin who emigrated to the UK aged five with his parents, studied there through to university, before securing a graduate position at a bank in Singapore in 1986. His successful career moved him to Hong Kong, where he met a UK-domiciled woman. They married and now have three children, aged 12, 10 and eight.
The family moved to Abu Dhabi in 2016, where the husband has a senior banking role. Aged 48, he expects to spend five years in the UAE before moving to the UK to conclude his career and the children their education.
The family owns a property in Hong Kong, which they let, generating a modest yield. They recently bought their ‘forever home’ in the UK, plus they own two London apartments, both showing a large capital gain.
All three UK properties have 50% mortgages and are let, producing a good yield. Earned income is high, with a monthly surplus of £7,000 ($8,900, €7,850) to £10,000, plus an annual six-figure bonus.
There is cash on deposit of around £2m built up from savings, a recently matured savings plan and liquidated Hong Kong pension schemes, all in the husband’s name.
There is a stated objective to retire at 60, mortgage-free, and they have income from investments of £60,000pa net (today’s terms), in addition to rental income.
They want to save regularly, keep at least £500,000 in cash, not tie up too much in structures with exit charges and are concerned about UK inheritance tax (IHT).
The couple requested appropriate financial advice to help them structure their long-term financial plans.
The advice
• Property
As future UK residency for the family is extremely likely, capital gains tax (CGT) on the property portfolio was considered.
The Hong Kong property shows substantial gains and only a modest yield, so the advice is to sell before becoming UK residents, with no tax due to any tax authority. Ownership could be transferred to the non-domiciled husband, allowing future sale as a UK resident using the remittance basis of taxation.
However, this may only apply for seven years and would permanently preclude remittance of proceeds to the UK, unless tax was paid. Additionally, equity in the Hong Kong property is equal to the outstanding mortgages on the three UK properties, providing the clients the option of clearing all mortgage debt. A sale is now planned.
Yield on the London apartments is good but capital growth is also high. Sale now would see CGT payable on gains from April 2015 only, whereas sale as UK residents would involve tax on all gains from date of purchase.
The apartments could be held until death, but IHT would then be likely. Consequently, sale of both units is planned, staggered over two tax years to utilise CGT exemptions.
Subsequent reinvestment in UK property will maintain yield yet rebase purchase prices. Mortgages will be maintained to offset against rental yield for basic rate tax. A 3% stamp duty land tax (SDLT) surcharge will apply on new purchases.
The ‘forever home’ shows negligible gain and, while let at present, will in time become the main residence. There is a strong chance of owning the house for life, so IHT is the issue, not CGT. A mortgage will be maintained, providing short-term interest offset against yield, and longer-term IHT advantage by equivalent investments being held outside the UK in the non-dom husband’s name.
• Liquid assets
All liquid assets are in cash in the husband’s name, so we agreed to invest for real growth. This is beneficial as the wife’s UK domicile would make trust and IHT planning difficult.
With UK residency in mind, a £1m offshore portfolio bond was arranged in the name of the husband to accrue time-apportionment relief and several years of 5% tax-deferred withdrawals, ahead of repatriation.
Once UK resident, gross roll-up, segment assignment and top-slicing benefits apply, plus an Excluded Property Trust (EPT) is in place in case he acquires a UK domicile.
The wife is, and the children will likely become, UK domiciled, so the EPT provides succession planning and asset protection, with 5% tax-deferred withdrawals still available to contribute towards income in retirement.
A discretionary fund manager (DFM) was used to manage the underlying funds.
Additionally, the client wanted to invest a further £500,000 with penalty-free access, and this was arranged with the same DFM outside of the bond. Once the Hong Kong property is sold, the equity will be invested in this strategy, giving easy access if ever appropriate to pay down mortgage debt.
The remaining £500,000 stayed in cash: arguably a little high but the clients were comfortable with this. Combined with the direct DFM investment, it also provides plenty of liquidity to utilise other UK products and tax exemptions after repatriation.
• Regular savings
To achieve the desired £60,000pa from investments in retirement with only a cautious/balanced attitude to investment risk, substantial additional saving is necessary, and a projection tool was used to model the savings and investment returns needed to achieve the goal.
As a result, a low-cost, non-contractual plan with zero exit charges is being used to provide disciplined £10,000pm savings.
This, together with 75% of his annual bonus, will be transferred periodically into the offshore bond for tax advantage and utilisation of the EPT. We considered accumulation in a bank account, but our strategy should provide some short-term growth and more discipline.
• Protection
Additional life assurance and critical illness cover will replace any lost income up to retirement, utilising an appropriate trust.
Going forward
Ongoing, a close eye must be kept on the clients’ repatriation plans and possible legislative changes, particularly to offshore bonds and trusts.
Perhaps too much value is outside the bond and trust and/or is UK situs. As the clients’ approach and enter retirement, more value will be transferred to this structure, if rules are still favourable.
However, at least time-apportionment relief is accruing and, as more wealth accumulates, advice will more strongly favour the bond/trust solution.
Further reading:
DFMs must focus on NRIs and other non-UK nationals
