Tax and financial planning since 1898British Chamber of Commerce, Hong Kong, June 2011 The Fry Group UK Tax Considerations in Property Ownership for British.

Tax and financial planning since 1898British Chamber of Commerce, Hong Kong, June 2011

The Fry Group

UK Tax Considerations in Property

Ownership for British Expatriates


Agenda• Martin Rimmer

– Group Tax Technical Manager– The Fry Group : Holistic Financial Planning

• UK Taxation – Planning and Compliance• Succession – Will writing, Inheritance Tax, Trust Planning• Wealth Management and Financial Planning

– Hong Kong Office – James Sutton, Justin Davies and Simon Ho

• Presentation

• Q & A


Opportunities• UK Property Market

– Historical opportunity– Capital growth and steady income return– Traditionally a low-medium risk investment

• UK – Highly developed system of income and capital taxation

• Realising opportunities most profitably requires– Understanding of how property is taxed– Understanding of how YOU can avoid that tax – Action

• Individual solutions to individual circumstances• Aims

– Overview of UK Tax Position – Basic tax issues and planning opportunities– Q&A.


Today’s Presentation

• The Long Arm of the UK Tax Man

• The Main Taxes– Income Tax – Capital Gains Tax– Inheritance Tax– Stamp Duty

• What we haven’t considered.


Favourite Tax Quotes (1)

“The hardest thing in the world to understand is income tax”

Albert Einstein


The Long Arm of the Tax Man Your Exposure to UK Taxation is driven by

Residence Domicile

Domicile Where have I come from? Where am I going to?

Will I stay here? UK domicile unless you intend to remain in

Hong Kong permanently.

Income and Capital Gains TaxInheritance Tax

Residence Where do I live? Where do I spend my time? How much

time do I spend there? Where am I now? Not live in the UK Meet standard visiting limitations


The Long Arm of the Tax Man

Just how exposed are you to UK tax?

Resident Non-Resident

Income Tax World-wide Income UK IncomeForeign Income exempt from date of departure

Capital Gains Tax World-wide Gains Full exemption from 6th April following departure if non-resident for at least 5 consecutive tax years

Domiciled Non-Domiciled

Inheritance Tax World-wide Estate UK Estate only


Income TaxWhen will it arise for a Property Investor?

– When letting UK property at a profit– On capital gains from certain land/property transactions

Rental Profit– Gross Rental Income less Deductible Expenses

““Wholly & Exclusively”Wholly & Exclusively” ““Capital vs Revenue”Capital vs Revenue”

Mortgage InterestRepair & MaintenanceAgents Fees10% Wear & TearAccountancy etc.

Certain Legal FeesReplacement FurnishingsStorage ExpensesImprovement ExpensesTravel Expenses

Allowable vs DisallowableAllowable vs Disallowable


Income Tax …… cont.

• Overseas Rental Properties – exempt unless– resident and domiciled in the UK– Foreign letting assessed identically to UK letting

• Personal Allowance– £7,475 per person per year– Next £35,000 of profit taxed at 20%– Next £115,000 of profit taxed at 40%– Balance at 50%

• Obligations to HM Revenue & Customs– Undertake to keep HMRC informed– Non-Resident Landlord Scheme– Tax Return if : (a) taxable income, (b) receive return

or a notice to file– 30th September, 31st October & 31st January



• What about rental losses?– Carried forward– Set against future rental profit– Keep good records– Furnished Holiday Letting loss offset against other income

• Basic Tax Planning– Dilute ownership : joint names or wider– Increase mortgage : re-invest funds ex-UK– Grant lease : to create limited capital gain– Consider offshore company : if profit is sufficiently great



Income Tax on Capital Gains for Non-Residents? YES!

1. Profit Motive2. Regular Transactions3. Enhancement4. Planning Permission etc.

Capital Gain = UK Trading Profit

Taxable as UK income at graduated rates

….. If you are trading in UK property


Favourite Tax Quotes (2) “The income tax code is about 10 times the size of the

Bible – and unlike the Bible, contains no good news”Don Nickles

“People who complain about taxes can be divided into two classes – men and women”

Noel Coward


Capital Gains Tax• What is it?

– Annual Exemption of £10,600 per person– 18% and 28%

• When will it arise for a Property Investor?– Whilst resident in the UK– Usually, in the tax year of departure from the UK– Potentially in any of the next 5 tax years– Usually, from date of arrival in UK– Sale of world-wide property

• Key Issues to Grasp– The extent of Principal Private Residence relief – The tax on accrued gains at return to the UK– CGT from date of return = Tax the whole gain


Capital Gains Tax…….cont.• “But it’s my main home in the UK…”

– Principal Private Residence vs Investment Property

“…requires a ‘degree of permanence’, necessary ‘quality’ of occupation and the expectation of continuity….”

• One per person or couple….. in the world

• Relief for actual occupation, and– Last 36 months of ownership– Up to £40,000 per owner if let– Full exemption if employment wholly overseas– 36 months for any reason (if re-occupied)– Deemed occupation if Crown Servant / Job Related

• 3 Examples


Capital Gains Tax…….cont.Example 1 : Your Main Home in Hong Kong

– If accepted as your Principal Private Residence– Relief for occupation, and– The last 36 months of ownership, and– Up to £40,000 per owner to cover let periods– Care with Exchange Rates

Proceeds ($1,000,000 / 2) £500,000Less: Cost ($750,000 / 3) (£250,000)Gross Capital Gain £250,000Relief for 6 yrs occupation (£125,000)Relief for last 3 years (£ 62,500)Maximum Relief for Letting (£ 40,000)Capital Gains after Reliefs £ 22,500 Annual Exemption (£ 10,600)Taxable Balance £ 11,900

Tax at 18% £ 2,142

Effective Rate of Tax = 0.86% of gross gain

Example Sold for $5m (£1 = $10) Bought for $3.75m 12 yrs ago (£1 = $15) Profit of $1.25m Occupied for 6 years and rented for 6 years


Capital Gains Tax…….cont.Example 2 : Investment Property in Hong Kong

– Not your Principal Private Residence (though this is an option)– No particular reliefs– Care with Exchange Rates

Proceeds ($1,000,000 / 2) £500,000Less: Cost ($750,000 / 3) (£250,000)Gross Capital Gain £250,000Annual Exemption (£ 10,600)Taxable Gain £239,400

Tax at 18% on £ 35,000 £ 6,300Tax at 28% on £204,400 £ 57,232

Total Capital Gains Tax £ 63,532


Example Sold for $5m (£1 = $10) Bought for $3.75m 12 yrs ago (£1 = $15) Profit of $1.25m Never occupied as a home


Capital Gains Tax…….cont.Example 3 : Your Retirement Home in the UK

– If accepted as your Principal Private Residence– Relief for occupation, and– The last 36 months of ownership, and

Proceeds £750,000Less: Cost (£250,000)Gross Capital Gain £500,000Relief for 1 yr occupation (£ 41,667)Relief for 2 (of 3) last years (£ 83,333)Gross Gain after Reliefs £375,000Annual Exemption (£ 10,600)Taxable Balance £364,400

Tax at 18% on £ 35,000 £ 6,300Tax at 28% on £329,400 £ 92,232

Total Capital Gains Tax £ 98,532


Example Sold for £750,000 in Oct 10 Bought for £250,000 in Nov 98 Profit of £500,000 Vacant and occasionally used up to move to UK in Nov 2009 Owned 12 years Occupied 1 year


Capital Gains Tax…….cont.

Current Main Home in Hong Kong : Not really a problem Prospective Main Home : Potentially a serious problem Investment Property : Is it really a problem?

Solutions

Do nothing : Worry about it later & hope the rules change Sell before return : Tax-free gain, but stamp duty if buy? Don’t sell after return : Is this really realistic? Give the property without reservation : Pay market rent? Place Property into a Short Term Trust


Capital Gains Tax…….cont.

TRUST TRUST

Transfer InTransfer In Transfer OutTransfer Out

Return to the UK and occupies propertyas main residence

Trust acquires Property at OMV

of £750,000

Gain of £500,000 realised whilst

non-resident

No charge to Capital Gains Tax

Tax Saving of £98,532



“Intaxication – that feeling of euphoria you have when you get a refund from the taxman. It lasts exactly as long as until you realize it was your money to begin with”

The Washington Post

“Benjamin Franklin said nothing is certain but death and taxes; but at least death doesn’t get worse every year”. Anon


Inheritance Tax Basics

What is it?– Transfer of Value from your estate– Legal & Beneficial ownership pass to another

When can it apply?– Upon Death – Upon certain life-time gifts– Within Most Trusts

At what rates?– 40% – 20%– Up to 6% every 10 years

What is taxed?– The net value of your estate after exemptions upon death– The net value of certain life-time gifts


Inheritance Tax Basics• 7 year rule

– Survive! Falls out of your estate– Die! Tax at 40% on the bequest

– Taper Relief grants reduction in tax payable on death on the lifetime gift

• Exempt Transfers on Death– To a like-domiciled spouse (unlimited)– To a UK charity or political party (unlimited)

• “Nil Rate Band” - £325,000– Applies to life-time gifts– Applies to value of estate upon death

• Annual Exemption - £3,000


Inheritance Tax Basics

Can I really be taxed on life-time gifts?

• Exempt Transfers No tax– Political parties / charities– To a like-domiciled spouse

• Potentially Exempt Transfer (PET) No tax– Gifts to any other person– From UK dom to non-UK dom spouse– 7 year rule applies

• Chargeable Lifetime Transfers 20% tax– Transfer into most Trusts- 7 year rule applies

YES!


Inheritance Tax Basics : Example

Monty gives £350,000 to his son in June 2008, and dies in July 2011 leaving a property worth £450,000

• Gift in June 2008 Potentially Exempt Transfer – no tax in lifetime

• Death in July 2011 : Tax on the giftGift £ 350,000(A.E) £ ( 3,000)(NRB) £ (325,000)Chargeable £ 22,000Tax @ 40% £ 8,800Taper Relief 20% £ ( 1,760)Tax Due on Death £ 7,040


Inheritance Tax Basics : Example

Monty gives £350,000 to his son in June 2008, and dies in July 2011 leaving a property worth £450,000

• Death in July 2011 : Tax on his estate

Value of Estate £ 450,000(NRB)Chargeable £ 450,000

Tax @ 40% £ 180,000

• Total Tax £187,040 • Total Transfer of Value £800,000

• Effective Rate of IHT 23.38%

£ ( 0)


Inheritance Tax• Domiciled in UK : World-wide Assets

– Including assets in Hong Kong and elsewhere– HMRC will give relief for foreign Inheritance Tax paid

• Domiciled non-UK : UK situated Assets only• Transfer to like-domiciled spouse on death?

– Nil Rate Band x 2 = £650,000– Mortgage and BPR assets – high risk

• Gift without Reservation? 7 Year Rule• Life Assurance?• Domicile of Choice in Hong Kong?• Spouse Domicile ex-UK?• Mortgage and export/invest funds?• Offshore company to hold UK property? • Have UK/local will.


Stamp Duty Land Tax

£0 - £125,000 0% £500,001 - £1,000,000 4%£125,001 – £250,000 1% £1,000,001 - 5%£250,001 - £500,000 3%

• Tax on the purchaser, regardless of residence

• Payable within 30 days of completion

• Not a graduated tax – negotiate your price carefully!

• SDLT on property sold for £500,000

– £500,000 x 3% = £15,000

• SDLT on property sold for £500,001

– £500,001 x 4% = £20,000

• Due on gifts of property (SDLT on outstanding mortgage)

• No SDLT on gifts of unmortgaged property

• Due on transfer of property to a company or trust

• Avoidance using Islamic schemes….


What we haven’t considered!• Equity Release and Deductible Interest• Gift With Reservation / Pre-Owned Asset Tax

– You give property and still live in it

– You sell property, give cash, recipient buys house and you live in it

• Sale of Business Property (FHL)– Business Asset Taper Relief (75% v 40%)

• Inheritance Tax on Business Property– Business/Agricultural Property Relief

• Property Investment Companies• Excluded Property Trust for non-domiciled

property investors



“A tax lawyer is a person who is good with numbers but does not have enough personality to be an accountant!”

James D Gordon IIIAvailable for consultation: James Sutton (Hong Kong) Justin Davies (Hong Kong) Simon Ho (Hong Kong) Martin Rimmer (UK)



“The trick is to stop thinking of it as ‘your’ money”Revenue Inspector


Questions?

Tax and financial planning since 1898British Chamber of Commerce, Hong Kong, June 2011 The Fry Group UK Tax Considerations in Property Ownership for British.

Documents

uk tax man

income tax code

tax year of departure

favourite tax quotes

british chamber of commerce

uk property slide

planning permission

taxable income