The Serial Expat – FICs and QNUPS

The Situation
Mr T is a single expat man in his mid-40s with no dependants and no UK commitments. Having worked overseas for the past 15 years, never staying any longer than four years in any country, he has been posted to Hong Kong for two years by his UK parent company. His annual income is £130,000 and his investments and savings total £2 million, plus various company pension schemes. He intends to remain working abroad until his planned retirement to Malaysia – where he owns a holiday property but is not yet resident – in about 10 years.

The Problem
Although Mr T has been out of the UK for 15 years, because he has not yet established any permanent links in Malaysia (or elsewhere), he remains UK-domiciled and subject to UK inheritance tax (IHT) at 40% on his worldwide estate after allowances of approximately £325,000.

The Solution
If he prefers to leave his money to his relatives rather than the UK tax authority, he could set up a family investment company (FIC). Such companies are relatively inexpensive and easy to start and can be hugely advantageous. They utilise the principle of the potentially exempt transfer (PET). Under the PET regime, gifts made from one UK-domiciled individual are not subject to UK IHT as long as they are made at least seven years before death. If made between three and seven years before death, there is also a discount on the normal 40% rate.

Most people are reluctant to give away their capital early because they may need it or at least need the income from it. The FIC solves this problem by being incorporated with three different classes of shares. One class carries the right to votes only; one carries the right to income only; and the third carries the right to capital only. An individual can therefore transfer assets to the FIC, retain the control and income by keeping those respective classes of shares. But he can progressively give away the capital shares to his chosen heirs. This type of planning is highly effective.

Alternatively Mr T could transfer a significant proportion of his spare cash into a qualifying non-UK pension scheme
or QNUPS. This would put it outside the scope of UK IHT but it comes with restrictions that are appropriate to
pension funds. However a mix of QNUPS and FIC may work.

If any of his pensions were based in the UK, they would generally be subject to tax at source on drawdown. This is undesirable and possibly unnecessary. UK pensions could be transferred to a qualifying registered offshore pension scheme (QROPS). New schemes have recently started in Gibraltar and Malta. There are generally substantial tax advantages in transferring a pension offshore but those advantages will depend upon the scheme.

While Mr T is in Hong Kong he will only be subject to local tax on his Hong Kong income. His salary will be Hong Kong-source income so will be taxable at a very lenient rate of 16% after allowances. With planning, tax breaks are allowed. The biggest of these is that if his employer provides him with accommodation, he is taxed only on the cash value of the accommodation or 10% of his salary whichever is the lower. This can work out very advantageously. If he were paid US$500,000 per annum, he would pay tax on the whole US$500,000. If, however, his employer pays him US$350,000 and an accommodation allowance of US$150,000 he would only be taxed on US$385,000 (the full amount of the salary plus another 10% of the salary in accommodation benefits).

The income generated on his savings would not be taxable in Hong Kong, so it would normally be advantageous to lodge his investments in an offshore jurisdiction.

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