Tony Mudd: The challenge of advising globally mobile clients

Despite the potential benefits of the time apportioned reduction, bed and breakfasting could be a better option for international clients

Most experienced advisers will have internationally mobile clients; for example, those with spouses from different jurisdictions or those who intend to move abroad. Advising such a client can have its difficulties. An examination of investment bonds alone is a case in point.

Time apportioned reduction

As is well known, where the owner of an investment bond has not been resident in the UK for tax purposes for the time the policy has been in existence, the chargeable event gain on termination can be reduced by multiplying it by A/B. “A” is the number of days the investor has been UK resident and “B” is the total number of days the policy has been in existence.

Since the Finance Act 2013, the time apportioned reduction has also been available for onshore as well as offshore bonds, although for most practical purposes it is of greatest relevance for offshore policies.

There is also a specific rule relating to the time apportioned reduction and its interaction with top-slicing relief. The number of years used for top-slicing is reduced by the number of complete years for which the policyholder was not resident in the UK.

Bed and breakfasting

Despite the potential benefits of the time apportioned reduction for some, it may be possible to “wash out” a gain completely. In other words, to encash the bond while the investor is in a tax-advantaged jurisdiction, such as a territorial-based tax system, and reinvest.

Any investor intending to carry out such a “bed and breakfasting” exercise should ensure the encashment takes place before UK tax residency is established.

But which of the two options is better? The answer is not black and white. That being said, one can demonstrate the time apportioned reduction has attractions over bed and breakfasting.

As the example below illustrates, where a consistent growth profile is achieved throughout the term of the investment, the time apportioned reduction will result in lower chargeable gains once the individual has returned to the UK. This is irrespective of the relative periods of residence and non-residence. Further, the relative advantage of the time apportioned reduction in producing smaller chargeable gains increases where growth achieved in a period of subsequent UK residence is higher than that achieved when not a UK resident.

Where the bond is retained but growth is likely to be lower during the investor’s period of UK residency, bed and breakfasting should produce a smaller gain chargeable for UK tax than would arise using the time apportioned reduction.

However, in order to make a proper analysis of bed and breakfasting versus the time apportioned reduction, it is essential to weigh up the relative numeric advantages and set these against the practical issues that will apply. For example:

Encashing and “banking” any gains provides certainty. There should not be any circumstances under which those gains would be brought back into account for UK tax purposes.
A statement of the benefits of the time apportioned reduction assumes the bond is the correct and/or most appropriate investment choice for the client once he or she has returned to the UK. In other words, an onshore bond, unit trust, Isa, VCT, EIS, etc. will not be a more suitable investment vehicle.
Relying on the time apportioned reduction also assumes that the investor will return and take up tax residence in the UK.
If the bond has or will be held in an offshore trust, the time apportioned reduction will not be available.
Time apportioned reduction outside the UK

The time apportioned reduction is part of UK legislation and does not exist in the same form elsewhere. It will not, therefore, reduce the tax for an investor who returns to a jurisdiction other than the UK. However, the issue of whether to encash before returning to the UK or prior to establishing residency in an alternate jurisdiction may need to be addressed (see table). As with the UK, however, the position is not always clear.

They say it is a small world but the vagaries of international tax are not a contributory factor.