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bigduckontax, Accountant
Category: Tax
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My wife aged 60 and I aged 61 have recently returned to UK

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My wife aged 60 and I aged 61 have recently returned to UK having been non resident for 17 years. We intend now to retire and live on cash savings for next 4/5 years when UK state pension starts which we would supplement. We each have a SIPP offshore and several investment funds (Generali Vision plan, RL360 plan and OM managed pension fund. We intend not to use these for at least 4 more years. Can we minimise future income and capital gains tax by using the allowances over next 5 years? How?
Submitted: 2 years ago.
Category: Tax
Expert:  bigduckontax replied 2 years ago.
Hello, I am Keith, one of the experts on Just Answer, and pleased to be able to help you with your question. Assuming that you returned in the 15/16 tax year the split year principle will apply with one portion of the year non resident and the second resident. You will be liable to UK taxation on any income world wide over your personal allowance of 10.6K. Tax rates are £0 - 31,785, 20%, Higher rate band (40%) £31,866 - 150,000, Additional rate band Over £150,000 45%. Furthermore if your individual income exceeds 100K you loose your personal allowance by a pound for every two quid over. You can continue to make tax free contributions to pension plans up to 3.6K or 100% of income from employment which ever is the lesser. Capital Gains Tax attracts an Annual Exempt Amount of, currently 11.1K, a 'use it or loose it' allowance; if you don't use it is not carried forwards. You need to work within these limits to minimize tax. I accept that this a very general answer and you may feel the need to ask follow up questions of maybe provide me with more data.
Customer: replied 2 years ago.
My wife returned to UK from UAE in July 2015 and myself at end of August 2015 after 17 years abroad. All income prior to return to return to the UK was from employment in the UAE and can we thus assume UK income tax free?
We currently have no employment income but have cash due to end of service payments and also a recent inheritance. We intend to live off this cash for next four to five years. How can utilise our personal allowances both income and capital gains so we minimise the income/capital gains tax due on a) Our SIPPS and b) Our offshore plans previously mentioned.
Expert:  bigduckontax replied 2 years ago.
Yes, as I told you the split year principle would apply so your UAE income would be UK tax free. Inherited moneys, presumably from the UK, are tax free in your hands as Inheritance tax (IHT) will have been settled before distribution. Any interest earned on these moneys once in your hands will, of course, be subject to UK taxation. You cannot use your personal allowance if your taxable income is below that level. It is effectively money sunk and lost. Using your AEA against CGT depends upon what assets subject to that tax are the subject of disposals. Please advise in which Emirate you were actually located as the UK may not have a Double Taxation Treaty; for example it has one with Qatar.
Customer: replied 2 years ago.
We were in the UAE (Abu Dhabi)
We both have offshore SIPPS that would on draw down be subject to the new pension rules (25% tax free and tax on rest). If we drew down some of the funds now and stay under the 10.6K limit these would be tax free and tax claimed back?
Our offshore investment funds prior to return to UK have some gains and losses over the years. Are these liable to UK tax law prior to return? How will past and future gains/losses be treated under UK tax law? How can we utilise income tax/capital gains allowance each year for next 5 years until state pension due?
Expert:  bigduckontax replied 2 years ago.
The UK does not have a Double Taxation Treaty with Abu Dhabi. Thus if you have held over income from AD paid after the return date it will be subject to UK taxation and any tax credit from AD will be of no use to you. Drawing down pensions does indeed allow 25% tax free and the balance at your marginal rate of tax, but if the taxable element is below the Personal Allowance then, of course the whole lot would escape tax and tax deducted, if any, could be reclaimed. As I said the split year principle applies. Any gains of losses from the period you were in AD would be tax free. Once back in the UK then normal CGT rules would apply and the AEA come into play. You use your personal allowance by making sure that your taxable income does not exceed the allowance if possible. A similar principle applies to the utilisiation of the AEA. Remember, when you receive your State Pension it is taxable, but paid gross; another source of income to take into account.
Customer: replied 2 years ago.
My wife arrived in UK on August 7th 2015 and I on August 28th which date do we use for start date for capital gains on our joint offshore equity funds? How is capital gains calculated and tax paid on these equity funds? The intention is to draw down from them partial payments starting from 2019. How could we draw down the gain each year before 2019 to take advantage of the capital gains allowance? I assume we both have an allowance so this could be doubled. Does the fund have to be joint to use both CGT allowances?
With our SIPPS do you have to take the 25% tax free sum first before drawing down yearly payments? I assume there is no capital gains on these pension funds. How is the 25% calculated? Is it the % when one first draws down from the SIPP? If we draw down from my or our SIPP can we offset against my own personal allowance plus my wife's and so recover the 20% income tax already paid at source?
Does the SIPP have to be in our joint name for either person to offset against their PIA?
I understand that if your income is less than the PIA then one can still pay a small sum into a pension scheme and the government pays in 20% more. Is this correct? How does this work?
For savings income there is a 0% starting rate tax band of £5,000 above the personal allowance. What is savings income? I thought draw down of savings were tax free, only any gains are taxed?
My wife has a small teachers AVC pension valued by the provider at just over 4000 UK pounds. Is this value after deducting 20% tax from 75% of the value? Can she recover any tax from her AEA allowance this year as it has not yet been utilised?
Expert:  bigduckontax replied 2 years ago.
As they are joint holdings they are deemed to be held 50/50. Each of you will have a separate CGT computation and the split year principle will apply to each of you depending on the individuals' return date. Both of you will have an AEA. Hargreaves Lansdown advises: 'You can usually take up to 25% of each amount you move as a tax-free lump sum, and keep the remainder invested' Thus of every tranche you draw down a quarter will be tax free, the balance at your marginal rate of tax. However, if this is a pension scheme not approved by HMRC then the whole of the drawdown is classed as employment income, there wqill be no 25% tax free and the whole sum withdrawn taxed at your marginal rate.. Here is the guidance from EIM15400: 'All lump sum payments (including commutations: see EIM15427) out of non-approved schemes count as employment income' The income from the SIPP will be in the name of the person holding the SIPP. Paying up to 3.6K into a pension scheme when you have no employment income is possible. You merely pay, usually an insurance company, the sum net (2.88K) and they claim the tax relief in cash from HMRC. There is a 0% tax band for savings income in the 15/16 tax year, but its application is highly complex. Drawing down savings is outside the scope of tax unless a capital gain is involved. Here is an example from Tax Aid: 'With the same income [12780] in 2015-16, all the £500 of savings income is taxed at 0%. But if the taxpayer has £12,780 of non-savings income, then the 0% savings band available to them will be reduced to £2,820 (5,000 of 0% savings band less the ‘excess’ of non-savings income over the personal allowance = £2,180).' The full gamut you can read about here: Your wife can take the whole of her AVC pension pot out as a trivial commutation as it is below 10K. The tax treatment is as follows [source: The Pensions Advisory Service]: 'If benefits are not in payment, you should have the option to take 25% of the pension value as a tax-free cash sum. The remainder is added to the rest of your taxable income in the tax-year in which you take it when determining any income tax liability' The tax treatment is depressingly familiar! This is not a gain, but is a drawdown and is accordingly taxed as income.
Customer: replied 2 years ago.
For example:
On our joint equity plans (not SIPPS) if we draw down £23,000 per year on top of our state pension and assuming a capital gain on total of the plans was £15,000 that year how does one calculate the tax payable if any? Is this income or capital gains?Still unsure what is capital gains v income. If we put cash into a bank or a savings account one is liable to pay income tax on the interest. If you buy an asset including shares then gains are treated as capital gains. Share dividends are taxed separately. If you invest in a fund for say 3 years then when fund matures this is treated as income or capital gains? If you draw down each year from the fund is this income only or capital gains?
If either of us do not use our IT or CG allowances can they be transferred?
I am still unclear what savings income means hence my first question above. If savings have no capital gain then any withdrawals are tax free if there is gain is this taxed as income. If the gains are taken as CGT then there would be no income tax?
Expert:  bigduckontax replied 2 years ago.
That is 11.5K each of which 2.875K is tax free and 8.625K taxed at 20%, 1.725K tax. However, this is below your Personal Allowance so no tax would be due. Draw down is income, not capital gain. Your analysis of income against capital gains is essentially correct. The increase or decrease in value of your fund on maturity may be a capital gain or a loss. Drawing down from a fund as opposed to a pension scheme is a part disposal for CGT. CG allowances are not transferable, but a partner can transfer 10% of their unused personal allowance. Savings income is that from building society, bank deposits and the like and include the income by means of interest and dividends from stocks and shares. If you deposit a sum of money in an interest earning account then the deposit taker will add interest accounting for tax at the basic rate to HMRC. The revised sum can then be withdrawn without any tax penalties. Gains from stocks and shares are subject to CGT.
Customer: replied 2 years ago.
Sorry the future 23K draw down is planned from fund plans ie our savings not from a pension fund. This should not draw any taxation on its paid in amount unless there are capital gains. If draw down in one year was 5% of 460K (23K) then the capital gains realised that year would be 5% of the total gains so if total gain was 15K then gain realised 0.75K? So no tax due? Obviously this is simplistic as different funds have different gains. For example one plan has 10 funds is capital gains based on total gains per plan and % draw down or the gains/losses realised on the actual funds realised that year from each plan?
Your example of the 23K draw down from SIPPS works for the next 5 years and would give a tax free income which we would supplement with UK cash savings invested in various products to minimise tax and safe but give some protection against inflation.
Expert:  bigduckontax replied 2 years ago.
I told you that savings accounts attract no tax on withdrawal. If you are drawing from shares of unit trusts then there is always the possibility of a capital gain, but don't forget your AEA to offset this. A gain of 0.75K would be completely covered by the AEA of 11.1K as your surmise.
Customer: replied 2 years ago.
So to be clear our offshore savings policies such as Generali Vision, RL360 and Old Mutual managed pension fund? or each of its sub funds ? would be valued as of the day each of us returned to the UK. Any funds drawn down on that value would be tax free, and gains would be treated as capital gains. But how would the gains be calculated? Is it on % draw down of each policy giving % gain or on actual gain or loss on each fund realised.
Expert:  bigduckontax replied 2 years ago.
The draw down would be treated as a disposal. Presumably you know the purchase price and on draw down you would know the selling value. The difference would be the capital gain or loss as the case may be.
Customer: replied 2 years ago.
The purchased price in many cases was for many years ago and now would include gains or losses when non resident. I thought the purchased price would be defined as price when we once became UK resident.By the way the split year means that all our allowances would be factored by our resident days in UK/365
Expert:  bigduckontax replied 2 years ago.
This is not the case. Your purchases are not rebased.
Fortunately no, you receive a full personal allowance under the split year system.
Customer: replied 2 years ago.
If there is no rebase this means that any gains must be based on plan value not each fund as funds have changed over years.
Example 1 CGT calc.
Joint plan with cash paid in of £100,000 and gain of £10,000 (10%). Fund value being £110,000 when £10,000 is drawn down then gain associated with the draw down would be 10% of £10,000 so £1,000. CGT liability each as joint is £500.
Example 2 CGT calc.
Joint plan with cash paid in of £150,000 and loss of £15,000 (10%). Fund value being £135,000 when £10,000 is drawn down then loss associated with the draw down would be 10% of £10,000 so £1,000. CGT loss each as joint is £500 and could be offset against any gain.
Are these calculations in principle correct?
Expert:  bigduckontax replied 2 years ago.
Example 1 - Correct, but your AEA would make this gain not taxable within the CGT regime.
Example 2 - Correct; if 1 and 2 were done in the same tax year you would not need your AEA at all as the loss would cancel out the gain.
In general you have the right idea.
Expert:  bigduckontax replied 2 years ago.
Remember these transactions are not a draw down, but a disposal. You draw down from pension pots.