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Tax tips from a technical Expert Tax relief for migrants

Mark Green, head of tax & estate planning for Legal & General International, explains the benefits o

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As we struggle through what may shape up to become the coldest winter for many years, which followed yet another “wettest summer on record in the UK”, I think I would be sympathetic with anyone who decides enough is enough and goes in search of a warmer climate.

In fact I have since discovered that, every year since 2000 in the UK, over 300,000 people* (*Source: UK Office of National Statistics, October 2009leave the cold British weather to work overseas. What many do not realise is that it is not just the weather that can be attractive. An investment in an offshore bond could bring some valuable tax benefits from any absence from the UK.
 

Chargeable event liability
A UK resident will normally incur an income tax liability on any gain when a chargeable event occurs, for example, when they cash in the full value of an investment bond.

However, a claim can be made to reduce any gain and any associated tax charge in respect of all time spent outside of the UK during the period the bond has been invested. This is referred to as ‘time apportionment relief ’.

Only an offshore bond can generate this relief, as this is a unique benefit to offshore bonds.

So for any individual looking to invest, if there is a chance they may spend some time working outside the UK, the potential tax advantages of time apportionment relief should not be overlooked.

Example

Here’s an example to illustrate what I mean:
Kate invested in an offshore bond in March 1999 and then spent some time working overseas as a non UK resident. She returned to the UK in June 2003 and was regarded as a UK resident from that date. In November 2007, Kate decided to cash in her bond when she was a higher rate taxpayer, with a chargeable gain of £63,500.

Instead of paying tax of £25,400 (40% of £63,500), Kate has used the time she spent outside of the UK to reduce her tax charge to £13,249, a saving of £12,151 because time apportionment reduces chargeable gain to only £33,122.

The formula for time apportionment relief is:

Gain x Number of days as UK resident/Number of days the bond has been in existence

This benefit applies to additional investments into an existing offshore bond as these may also benefit from time apportionment relief, even though the additional investments may not have been made during a period of non UK residence.

In this way it may also be appropriate to continue to invest in an existing bond after returning to the UK. Topping up an investment could be more beneficial than taking out a new bond as it should reduce the tax charge on the gain from the additional investment with the benefit of time apportionment relief.

Mark Green is head of tax & estate planning for Legal & General International

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