Portfolio bond rules impacting returning UK expats set for review

An anomaly in the portfolio bond rules relating to impacting expats returning to the UK is due to be reviewed, following the publication of a new Personal Portfolio Bond consultation.

Expats working overseas and accumulating their wealth through an open-architecture portfolio bond could face a penal tax charge on the bond when they return to the UK unless changes to the current rules are made.

The Personal Portfolio Bond (PPB) document issued on Monday sets out the UK government’s consultation on the matter and its intention to now consider a full review. 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.

This effectively means all open-architecture portfolio bonds taken out by an individual while they’re living abroad must be  “endorsed” when they return to the UK, to limit their investment options, or they could face this 15% deemed gain tax.

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, according to Old Mutual Wealth.

PPB rules

Rachael Griffin, personal financial planning expert, Old Mutual Wealth, said that is important 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.

While many policyholders may be warned on this position by their financial adviser and take remedial action to ‘endorse’ their policy and sell any non-permissible assets, the review is still important to protect expat investors.

“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. “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.”

Old Mutual Wealth has provided an example of how this might work:

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 5 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 5 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.

Source: Old Mutual Wealth

Gary Robinson
Head of Video and Ezines at Open Door Media Publishing. Deputy Editor, International Investment. An experienced journalist and filmmaker with more than 20 years' financial services experience, both as journalist and originally as a fully qualified IFA, Gary works across both International Investment and InvestmentEurope titles. Previous video production credits include projects on BBC, C4 and SKY.

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