In recent years there has been an increase in the number of off-shore bonds and based on assets owned or the contract terms these may be defined as a Personalised Portfolio Bond (PPB), which can have very disadvantageous tax consequences for UK resident holders. For a UK resident who holds these bonds tax is payable each year based on a yearly deemed gain and the cumulative gains, taxed at marginal income tax rates.
This is anti-avoidance legislation which imposes a yearly deemed gain on life assurance and capital redemption policies where the property that determines the benefits is able to be selected by the policyholder.
Where a policy is regarded as a PPB then the legislation imposes a tax charge on an artificial deemed gain on the policy for policyholders who are UK resident individuals.
The tax charge based on the PPB deemed gain is payable yearly for UK resident policyholders. The PPB deemed gain is calculated at the end of each policy year while the policy is in force.
The PPB deemed gain assumes a gain of 15% of the premium and the cumulative gains for each year the policy has been in force.
John is a UK resident 40% taxpayer who invests £100,000 in a bond caught by the PPB rules and fully encashes it after 5 years for £140,000.
Insurance year 1 gain : £100,000 x 15% = £15,000 (tax due £6,000)
Insurance year 2 gain: (£100,000+ £15,000) x 15% = £17,250 (tax due £6,900)
Insurance year 3 gain: (£100,000 + £15,000 + 17,250) x 15% = £19,838 (tax due £7,935)
Insurance year 4 gain: (£100,000 + £15,000 +£17,250 + £19,838) x 15% = £22,813 (tax due £9,125)
Insurance year 5 gain: (£100,000 + £15,000 + £17,250 + £19,838 + £22,813) x 15% = £26,235 (tax due £10,494)
|Less total PPB gains||(101,136)|
John would get no relief for this deficiency. Accordingly he will have paid total tax of £40,454 on an economic bond gain of £40,000!
Although UK residents will usually avoid investing in PPBs, this point can often be missed by returning UK residents or those coming to the UK for the first time. The charge is based on a taxpayer’s residence status at the time of the policy anniversary and it does not matter where they were when the policy was entered into. This paves the way for nasty surprises when PPBs are unwittingly held for a long time by UK residents.
The take home message is therefore that people should consider the status of their investments before they arrive in the UK. There are a variety of courses of action which can be taken to deal with the problem, including changing the status of the bond so that it does not fall within PPB rules.
You can use this form to request us to give you a call or if you prefer just leave us a message. Please be sure to leave us a contact number or email address for you and we will get back to you as soon as we can.