In the draft Finance Bill on Monday, the UK government confirmed that it will review PPBs as announced in the Autumn Statement last month.
The investigation is designed to address cases where expats, who have used an open-architecture portfolio bond to save while working abroad, are hit with a penal tax charge on the bond on their return to the UK for holding non-permissible assets.
Lobler case
Rachael Griffin, personal financial planning expert, Old Mutual Wealth, said the review may have been prompted by the the 2007 Lobler case where Dutch national Joost Lobler was ordered to pay $560,000 (£390,418, €495,000) in tax on the $1.42m he withdrew in the ‘wrong way’ from a policy he set up with Zurich Life just two years earlier.
“The much anticipated review of this inequitable position may have been prompted by the Lobler case. Open-architecture portfolio bonds are a popular way for expats to accumulate wealth while working overseas, and provides them with access to a wide range of different assets,” said Griffin.
Ian Sayers, chief executive of the Association of Investment Companies welcomed the move when it was announced in the Autumn Statement.
“We are delighted the government is to take the powers to allow non-UK investment companies to be held in certain insurance based wrappers without adverse tax consequences.
“This would open up greater choice for investors by allowing them to include all investment companies in their portfolios, including those investing in assets such as property, infrastructure and debt.”
Deemed gain
Currently, there is a punitive 15% ‘deemed gain’ tax charge applicable where non-permissible assets are either held, or can be held, within a portfolio bond in the UK, Griffin explains.
This means all open-architecture portfolio bonds taken out whilst overseas must be ‘endorsed’ when they return to the UK to limit their investment options or they could face this 15% deemed gain tax charge.
This cumulative charge dates back to when they first took out the open-architecture bond, and could create a large tax charge regardless of whether a non-permissible asset is actually held or whether there has been any economic gain.
Example:
Mr Brown invests a premium of £200,000 in a bond on 1 December 2011.
He returns to the UK on 1 December 2016 and inadvertently holds non-permissible assets.
The tax charge he will need to pay is as follows:
Yr1 30,000 deemed tax gain (15% of £200,000)
Yr2 £34,500 deemed tax gain (15% of 230,000)
Yr3 £39,675 deemed tax gain (15% x £264,500)
Yr4 £45,626 deemed tax gain (15% x £304,175)
Yr5 £52,470 deemed tax gain (15% x£349,801)
Under the current HMRC methodology, the cumulative deemed tax gain after five years would be £52,470, even though he has only just returned to the UK. This would still be the case even if the bond had lost value over the five years.
The amount of tax the policyholder is then liable to pay HMRC will depend on their marginal rate of income tax. If they are a higher rate taxpayer they will need to pay £20,988 to HMRC
Inadvertent trigger
Griffin has now called on the government to ensure that any review of the PPB rules addresses the methodology used in calculating the tax charge and looks at correcting those cases which inadvertently trigger a tax charge when becoming UK tax resident.
The majority of policyholders are warned by their financial adviser about this and usually take remedial action to ‘endorse’ their policy and sell any non-permissible assets. Some life providers also flag this with policyholders to ensure they are not caught, she adds.
Griffin said: “It is easy to see how expats returning to the UK could be caught by this putative tax charge, and be liable to pay thousands to HMRC if they inadvertently hold a non-permissible asset in their bond or they fail to get their policy endorsed by their provider. Whilst we await the policy detail on this review, we are pleased the government is looking at addressing the concerns raised by the industry.”
