There are also tax breaks for the pension scheme itself so it doesn’t pay UK tax on income or gains.
This is all fine and dandy, but what about a UK expat, who now lives overseas – what is there position? Well under the new rules they can continue to make contributions into the UK personal pension scheme. However in order to obtain tax relief on contributions into a UK personal pension plan, the individual must either have UK taxable earnings in the year in which the contributions are paid, or meet one of the following conditions:
- The individual is resident in the UK in the tax year in which the pension contributions are paid or,
- The individual was UK resident at some time in the five years preceding the UK tax year in which the contributions are paid
Therefore a long term expat with no UK earnings would not qualify. In this case it’s worthwhile looking at other options for saving for retirement.Some of the key problems with a UK pension are the rigid rules that apply (and they may well be made even stricter). Although the tax relief on contributions is a big incentive the downsides include the fact that your contributions will be taxed when they’re paid out, having to wait before you can access the cash (usually 55) and the fact that once you hit 75 any cash in the fund is not left to your family on your death.
One option that could be considered would be to invest in an offshore insurance bond. In tax terms the treatment for the fund is the same as a UK pension in that investment income and dividends should be tax free, but in terms of flexibility it’s much more attractive. The insurance bond does not have any restriction on when cash can be extracted and you could leave the bond to your spouse or family if you wished.
In addition you can extract cash from the bond tax efficiently unlike a pension which offers little scope for tax planning. With some offshore funds you can extract 5% each year without incurring a tax charge. Alternatively you could own an offshore fund jointly with a spouse, thus splitting any tax charge (unlilke pensions which cant’e be transferred as they are ‘non assignable’).
In terms of expats contributing to an investment bond whilst they are non resident, but planning to return to the UK in the future, the investment bond offers a big advantage over a UK pension because there is a specific time apportionment relief. This ensures that any future gain is reduced according to the period spent as a non UK resident. A pension fund contribution would not attract any such relief.
This isn’t all. Extracting cash from investment bonds can lead to a top slicing relief claim. This reduces the tax charge for individuals who are taken into the higher rate tax band by the gain on the bond.
Finally, when you take an income from a pension fund, after deduction of the personal allowance, the income is put through the tax bands. This means that you pay tax at the higher rate after you’ve used up your basic rate band (currently £33,300).
There are therefore some significant advantages for non UK residents with no UK earnings from investing in an offshore investment bond.
Note that UK residents or those with UK earnings would be entitled to tax relief on contributions which could easily swing the balance the other way.
When looking at offshore funds there are essentially two different types. These are known as ‘distributor’ and ‘non-distributor’ funds.
The main difference between Distributor funds and Non-distributor funds is in the way any ‘gain’ on disposal is dealt with.
As a distributor fund distributes the majority of its income to the investor, UK residents would usually be subject to income tax on the income. Any gain arising on a future disposal would be subject to CGT.
By contrast a non distributor fund would usually be a “gross roll-up fund” and any ‘gain’ on a future disposal would be classed as an offshore income gain. The sale proceeds would then be subject to income tax and not CGT.
For most UK residents a distributor would be beneficial as this would allow CGT reliefs to be offset. In particular taper relief could reduce the effecttive tax rate to 24% for a higher rate taxpayer after 10 years ownership, and the annual exemptions (currently £8,800) could be offset. If the fund was a non distributor fund the gain would be taxed as income (eg 40% if you were a higher rate taxpayer).
Note if you are a non UK domiciliary, as the fund is treated as an overseas asset, any gain arising on a future disposal would be subject to the remittance basis.
Therefore for non UK residents, continuing investments into a UK personal pension may not necessarily be the best option.
Lee J Hadnum is a rarity among tax advisers having both legal & chartered accountancy qualifications. After qualifying as a prize winner in the Institute of Chartered Accountants entrance exams, he went on to become a Chartered Tax Adviser.
He previously ran his own his own tax consulting firm, and has written a number of tax books as well as editing the popular tax planning website http://www.wealthprotectionreport.co.uk.
For a limited time, Lee is offering a Free report on Offshore Teleworking from his Offshore Tax Site wealthprotectionreport.co.uk Wealth Protection Report offers a wide variety of information on tax matters including, Capital Gains Tax, Inheritance Tax and UK Emigration.
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