The Fry Group

1. The Fry Group UK Tax Considerations in Property Ownership for British Expatriates

2. 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

3. 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.

4. 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.

5. Favourite Tax Quotes (1) “The hardest thing in the world to understand is income tax” Albert Einstein

6. The Long Arm of the Tax Man Your Exposure to UK Taxation is driven by Residence Domicile Income and Capital Gains Tax Inheritance 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 • 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.

7. The Long Arm of the Tax Man Just how exposed are you to UK tax?

8. Income Tax When 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” “Capital vs Revenue” Allowable vs Disallowable Mortgage Interest Repair & Maintenance Agents Fees 10% Wear & Tear Accountancy etc. Certain Legal Fees Replacement Furnishings Storage Expenses Improvement Expenses Travel Expenses

9. 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

10. Income Tax …… cont. • 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

11. Income Tax …… cont. Income Tax on Capital Gains for Non-Residents? YES! • Profit Motive • Regular Transactions • Enhancement • Planning Permission etc. Capital Gain = UK Trading Profit Taxable as UK income at graduated rates ….. If you are trading in UK property

12. 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

13. 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

14. 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

15. 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) £500,000 Less: Cost ($750,000 / 3)(£250,000) Gross Capital Gain £250,000 Relief 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

16. 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) £500,000 Less: Cost ($750,000 / 3)(£250,000) Gross Capital Gain £250,000 Annual Exemption (£ 10,600) Taxable Gain £239,400 Tax at 18% on £ 35,000 £ 6,300 Tax at 28% on £204,400 £ 57,232 Total Capital Gains Tax £ 63,532 Effective Rate of Tax = 25.41% of gross gain Example • Sold for $5m (£1 = $10) • Bought for $3.75m 12 yrs ago (£1 = $15) • Profit of $1.25m • Never occupied as a home

17. 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 £750,000 Less: Cost (£250,000) Gross Capital Gain £500,000 Relief for 1 yr occupation (£ 41,667) Relief for 2 (of 3) last years (£ 83,333) Gross Gain after Reliefs £375,000 Annual Exemption (£ 10,600) Taxable Balance £364,400 Tax at 18% on £ 35,000 £ 6,300 Tax at 28% on £329,400 £ 92,232 Total Capital Gains Tax £ 98,532 Effective Rate of Tax = 19.71% of gross gain 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

18. 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

19. Capital Gains Tax…….cont. Transfer In Transfer Out Return to the UK and occupies property as main residence TRUST TRUST Gain of £500,000 realised whilst non-resident Trust acquires Property at OMV of £750,000 No charge to Capital Gains Tax Tax Saving of £98,532

20. Favourite Tax Quotes (3) “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

21. 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

22. 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

23. Inheritance Tax Basics YES! 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

24. 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 gift • Gift £ 350,000 • (A.E) £ ( 3,000) • (NRB) £ (325,000) • Chargeable £ 22,000 • Tax @ 40% £ 8,800 • Taper Relief 20% £ ( 1,760) • Tax Due on Death £ 7,040

25. 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 • £ ( 0) • 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%

26. 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.

27. Stamp Duty Land Tax • Tax on the purchaser, regardless of residence • Payable within 30 days of completion • £0 - £125,000 0% £500,001 - £1,000,000 4% • £125,001 – £250,000 1% £1,000,001 - 5% • £250,001 - £500,000 3% • 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….

28. 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

29. Favourite Tax Quotes (4) • “A tax lawyer is a person who is good with numbers but does not have enough personality to be an accountant!” • James D Gordon III Available for consultation: • James Sutton (Hong Kong) • Justin Davies (Hong Kong) • Simon Ho (Hong Kong) • Martin Rimmer (UK)

30. Favourite Tax Quotes (5) “The trick is to stop thinking of it as ‘your’ money” Revenue Inspector

31. Questions?