Today’s globally mobile expat may live and work in several countries before finally settling down to retire. Effective planning, therefore, can reduce the impact of taxation while retaining a high degree of investment freedom and access to money when required.
Case study: two tax systems, one solution
The client
George has worked for eight years in Singapore but has a 10-year posting in London before he retires in his native Australia.
He and his wife are both excited about the future but concerned as to the effect higher UK taxes will have on their standard of living.
Having been an active saver while in Singapore, George has amassed £2m ($2.62m, €2.28m) in a range of Singapore-based unit trusts.
He believes that this money will support him during retirement and provide around £1m to purchase a property on his return to Australia.
George is happy with his investment portfolio and would prefer to retain the same funds. But, in London, he may need to dip into his savings to support his lifestyle.
Following a discussion, it is understood that George will need around £50,000 per year from his savings while he is in London. He wants to know what he can do to make his savings as tax efficient as possible both in London and when he returns to Australia.
Tax
- In London
As a non-domiciled UK resident, George could benefit from the ‘remittance basis’ of taxation, meaning he would only pay tax on income and gains brought into the UK.
There would be a charge to continue using this facility once George has been resident for seven out of nine years.
Given George needs to bring £50,000 per year into the UK, the remittance will have limited impact.
As his investments are ‘offshore non-reporting’ funds, the UK tax treatment is not particularly friendly, with income and gains remitted to the UK subject to UK taxation at his marginal rate of income tax with no capital gains allowance.
This means his £50,000 could be taxed by up to 45%.
- In Australia
When George returns to Australia, he can benefit from a ‘deemed sale’, effectively rebasing his acquisition cost of his unit trusts to the value on the day of his return.
As an Australian tax resident, he will pay tax at his marginal income tax rate each year on dividends and capital gains.
Once he has been resident in Australia for two years he will begin to benefit from a discount of 50% on his capital gains, meaning only half of the gains will effectively be taxed.
The advice
The recommendation is that George should invest £1m into a single premium portfolio bond. This can be funded by transferring his existing investments into the bond, avoiding the risk of being out of the market and retaining George’s preferred funds.
The remaining £1m can remain invested and be sold before returning to Australia to fund the property purchase.
The outcome
- In London
The income George needs can be provided by using the portfolio bond’s 5% tax-deferred withdrawal facility, without being subject to UK tax at the time of the withdrawal.
As George would have returned to Australia before making any further withdrawals, which means no UK tax would be payable, it is a significant improvement over paying tax of up to 45%.
As the income and gains from the remaining unit trust portfolio would not be remitted to the UK, no UK tax would be due on these.
- In Australia
There would be no tax on income and gains inside the portfolio bond, and no tax would be payable on withdrawals from the bond.
This is because it is treated as an insurance policy for Australian tax purposes and will have been in place for more than 10 years by the time George begins to make withdrawals in Australia.
The remaining unit trusts would be sold before George returns to Australia, meaning that no Australian tax would be payable on the gains realised.
Summary
Effective planning can significantly improve the tax position for the internationally mobile expat as they move around the globe.
Given expats tend to have more complex financial affairs, it is important they talk with an adviser as early as possible, so they fully understand their tax position and can put in place a wealth plan that will help them in the present day as well as in the future.
When undertaking this type of planning, with the increased focus on tax transparency, planning should be straightforward, non-contentious and compliant for each jurisdiction where a client is likely to live.
Further reading:
International planning crucial for expats returning home
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By Ian Black, head of financial planning and wealth solutions, AAM Advisory
