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Offshore Tax Planning PDF Print E-mail
Friday, 05 December 2008 15:27

Offshore Tax Planning

However, the timing may be out of your hands - if you are in a 180-day notice account or a fixed-term ‘bond’, for example. To pull out early will almost certainly mean what you save in tax could be deducted as a penalty for early withdrawal.

Some 130,000 people leave the UK every year, according to the government’s latest labour force survey. Those who are posted abroad at short notice are not going to have time to sort out all their affairs before they go, but it is important that they speak to a tax specialist at the first possible opportunity once abroad and to make sure that they are aware of the repercussions of financial decisions they take while outside the UK tax net, otherwise there will be some nasty shocks waiting at home.

Offshore Tax Planning - Capital Gains Tax

Take the case of capital gains tax (CGT). Sandra Nattrass, a partner in the executive services group at KPMG, says: “The change in tax law in 1998 means that gains made outside the UK can be taxable in the UK.”
It was in fact the March 1998 Budget that extended CGT liability to cover expatriates for up to five tax years after their departure. Any disposals during an absence of less than five years will be treated for tax purposes as happening in the tax year in which an expatriate returns. This means expatriates only have the one tax year’s CGT allowance - currently £7,100 - to claim against any gains.

If you were already abroad on 17 March 1998, you will not be affected by the five-year rule, which is not retrospective. As Sandra Nattrass says: “There could be a very different situation for expatriates working on adjoining desks.”
What a tax professional will help you to do is get the timing right. This relates not just to the country to which you are returning but also to the country you are leaving. “There can sometimes be a benefit in coming back to the UK midway through a tax year because you gain access to lower-rate tax bands,” Nattrass comments.

“But what you have to do is to look at the tax situation in the country you are working in because you may be better off being taxed there than at a lower rate in the UK.”

Offshore Tax Planning & Nattrass

Nattrass suggests that you need to start looking at your investment portfolio in the tax year before you come back. “If you come back in April or May you need to look at your portfolio in the December or January before,” she says. “You need to change its base value. For example, if you own UK shares which you bought at £2 and which are now worth £18, it is better to sell them and buy them back while you are overseas. Then the CGT liability on your return is only on the difference between what you bought them back for, say £16, and £18 rather than the difference between £2 and £18.”

However, be aware that such a practice - often referred to as ‘bed and breakfasting’ - was also targeted by the UK Chancellor in the March 1998 Budget. A minimum time limit on such transactions was introduced, which means you can no longer sell investments and buy them again the next day in order to reduce their base cost for CGT purposes. You must either sell them and not buy them again for a minimum of 31 days, or sell them and buy something similar with the proceeds.

Offshore Tax Planning - KPMG

KPMG also advises that you sort out dealings with the tax authority in your host country at the earliest possible opportunity. “Some countries need you to sort out your tax affairs before you leave. And, if you don’t, this could make a difference if you ever need to go back to the country,” Nattrass says.
Another thing to bear in mind is that any state pension contributions you make while you are abroad may be taken into account when you return to the UK.

“If you are paying into a European (Union) pension you can build up your UK Social Security contribution. You should bring the details home because you may be able to claim when you are 65,” Nattrass advises.
Perhaps most importantly of all, be aware that if you are away for an extended period of time that the fiscal goalposts may well have moved while you were away.

As KPMG’s Nattrass observes: “I would say this, wouldn’t I, but speak to a tax adviser. Life does change while you are overseas. Something draconian may have happened. You may be expecting a tax break that has disappeared.”


For more relevant news items and magazine articles please click the links below:

Editors Comment: Budget Special 2009

Article: Singapore or Hong Kong? A Conundrum  - Written by Dermot Butler, CEO, Custom House Global Fund Services

Article: Offshore Bonds - solutions for all seasons





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