The UK Scene
Many people mistakenly believe that life assurance is subject to capital gains tax. This is incorrect and with one rare exception it is subject to income tax whenever a chargeable event occurs. Typical chargeable events are maturity, surrender, assignment for a consideration, or a significant change in the policy conditions. The UK is also one of the few countries that taxes the internal growth of its domestic life assurance policies which makes it unattractive for non-residents to apply for a policy from a domestic UK Company as no credit will be given for the underlying tax.
On the plus side the UK does offer future advantages to those who have bought non-UK policies with gross rollup during their expatriation. There is an annual withdrawal allowance of 5% of the initial investment which can be used to generate an income stream on which tax may be deferred until you are in a lower tax band, and there is a facility that will allow you to avoid paying tax on the part of the gain that has accrued before you resumed UK residence. The 5% allowance is also cumulative so any part of it that is not used in one year is automatically carried forward and added to future years.
It can happen that a large encashment in one year could push your income up so much that you end up in a higher income tax bracket. Fortunately there is also a facility called top-slicing relief that will reduce the impact.
It is also very important to make sure that your policy is issued as a cluster of separate segments rather than as one single policy. In other words an investment of £100,000 could be divided into 100 segments of £1,000. This can reduce tax in the early years of a policy if you make an encashment that exceeds the cumulative 5% allowance.
Coming and going?
You can make some significant tax savings by planning your date of return to the UK and on certain occasions by restructuring your portfolio before you move.
Please contact us for more information on any of these issues.