I would like to let you know that I will be visiting our Hong Kong office for what will be the first of a more regular series of visits.

If you would like an appointment to discuss any area of UK tax planning, please contact Edita Tsang on 2526 9488 or by email at edita.tsang@thefrygrouphk.com. It would be helpful if you could indicate the topics you wish to discuss either when making the appointment or by completing the attached form. When making your reservation, could you also advise Edita whether you think you would like a 30 minute or 60 minute meeting.

Meetings will take place at our offices which are located at Room 2005, Tower 1, Lippo Centre, Admiralty, Hong Kong and typically last for one hour. We do not charge for initial consultations or where you simply want to update us about your plans and circumstances. However, as I am sure you will appreciate, our standard advisory charges do apply for the time spent in giving you personalised tax advice. If you think that you will need such advice, please contact me for a quote and I will also explain how you can prepare so as to make best use of the time. My email is martin.rimmer@thefrygroupsg.com or telephone +65 6225 0825.

New Tax Planning Opportunity

For anyone who is considering a move back to the UK or wishing to protect their wealth from Inheritance Tax, the law now allows for the possibility of enjoying potentially significant UK tax benefits if you decide to make savings into a properly constituted Hong Kong pension scheme. i.e.

• Pension income may be taken without income tax in the UK if certain conditions are met
• Gains can be realised within the pension fund without capital gains tax, and
• You can pass the pension fund on without inheritance tax if it meets certain conditions.

This is an exciting development in UK tax planning for expatriates in Hong Kong. However, the tax advantages are not open to everyone, there are certain conditions imposed by the law and it may not be a suitable vehicle for you generally. That said, the advantages are compelling and we would be happy to advise you whether it could be a suitable tax planning solution for you. Please contact Edita to arrange a chat with me if you would like to find out more about the tax benefits.

In the meantime, needless to say if you have any friends or colleagues who might be interested in an initial chat, please feel free to forward my details to them.

Martin Rimmer

Tax Manager – Asia Pacific

Global equity markets have continued to sell off this week set against a backdrop of concern over the eurozone debt crisis and the strength of the US economic recovery. But is that a cause for panic?

Our view is “no”.

Reverting to fundamental analysis of human behaviour, all investment decisions are either based on ‘fear’ or ‘greed’. No doubt markets are gripped by fear at the moment but that mustn’t be a reason to rush into irrational investment decisions. For example, during equity market volatility, the gut reaction is typically to sell and revert to cash or government bonds. But, allowing for inflation, cash will lose you 5% a year at the moment and bonds are likely to lose you 2% – 3% a year. I hasten to add that one should hold bonds if a secure income is a priority but perhaps within a strategic bond fund as a means of enhancing/protecting returns.

Our conviction is that Western economies will have to monetise their debt (ie: continue to print money) to get out of this slump and, in the end, that will result in a rise in inflation. Over the medium to long term, set against that backdrop, the fundamental appeal of real assets such as equities remains apparent. However, effective stock and asset selection is key to navigating an upward path through these volatile times and anyone in trackers where stock selection or diversified asset allocation is not an option is likely to be in for a bumpy ride over the short term.

In the meantime, the good news:

• In the majority of cases, a correction doesn’t turn into a bear market according to a new note from Birinyi Associates:

- Since 1962, there have been 25 corrections greater than 10% during bull markets. Nine of these instances became bear markets. Historically there is a 64% probability that this is only a correction and not the start of a bear market.

- The average correction is 13.2% and lasts 118 days. If this market follows the pattern of the average correction, the FTSE100 will bottom at 5,268 on the 25th of August.

• Wall Street has never been more sure the Standard & Poor’s 500 index will rally in 2011, even after speculation the US economy is heading for a recession prompted the biggest plunge since the bull market began. Chief strategists at 13 banks from Barclays Plc to UBS AG see the benchmark measure of American equities surging 17% through to December 31, the average estimate in a Bloomberg survey.

• Corporate health is strong for many companies across the globe according to fund managers. Jupiter CIO John Chatfield-Roberts:

“It is at difficult times like these that we have to remind ourselves that companies are generally in excellent health. By way of example, two-thirds of the US companies in the S&P 500 Index have now reported Q2 earnings and 73% of those have exceeded analyst expectations. That said, they are understandably making cautious outlook statements to the market.”

For further information on the current state of markets Patrick Armstrong of Armstrong Investment Management provided this interview on CNBC on August 3rd.

Our message for the time being is to sit tight and not to lose sight of the long term objectives of your portfolio. Of course, if you have concerns or wish to review your investment portfolio, or to discuss your investment strategy please contact us.

At the UK Budget on 23rd March 2011, it was announced that the Government is to consider introducing a statutory residence test.

This test, which would come into force in April 2012, should provide a legal framework by which taxpayers can determine whether they are resident in the UK or not.

Press speculation about this topic is sure to be widespread. The Revenue’s attitude on residence rules has become increasingly stringent in recent years, and the legislators have a tricky job on their hands to try to ensure the test is reasonable and useable. Hopefully a sensible solution can be found which satisfies the need of taxpayers, advisers and business for clarity on the one hand, and the Exchequer’s need for tax revenue today and tomorrow, on the other.

Whilst crystal ball gazing can always be hazardous, I would expect that certain elements will form part of the text:

(i) Days of presence in the UK – not just in the most recent tax year but perhaps over a period of years. In the last few years Parliament has debated the virtues or otherwise of the Irish and US day counting systems and it is questionable whether the current 91 day average rule will survive. That said, a count of the number of days an individual is in the UK is a measurable and provable fact and so I would be astonished if there wasn’t some kind of test along these lines.

(ii) Separate and different sets of conditions may well apply to those who leave the UK to work full-time and those who do not. Any terms should confirm the level of attachment a person in either category may have to the UK to be able to maintain their non-resident status. It is likely that items to be taken into account would include the availability of accommodation in the UK (which was in statute law until 6 April 1993) and in the host country, the location of immediate family members, the question of whether a person is resident in their host country for tax purposes, and where the duties of any employment are undertaken.

(iii) Some form of requirement for registration and deregistration for tax purposes in the UK might be introduced – i.e. an administrative step to prove that a person has left the UK or has returned. This is already a feature of many European tax systems.

There is a further facet to this. Will the new residence test help those people who are UK resident presently to break residence in the future? Or will it merely be a guidance mechanism to help non-residents stay non-resident, or to capture the unwary non-resident? It is too early to say for sure. However, it is unlikely that the new test will be entirely satisfactory to everyone. There will be winners and losers and inevitably there will be devil in the detail which will complicate any interpretation.

As with so much government legislation, time will tell. On a positive note The Fry Group expects to be fully involved in the government’s consultation process. After dealing with clients and residence issues for many years we are well placed to try to ensure that the test provides a sensible, useful framework for determining residence status.

If you have a concern about residence, and your exposure to UK tax whilst living overseas please contact us.

The UK Budget was announced on 23rd March 2011. For a Government so strapped for cash there was an obvious temptation to try and raise revenue from “non doms” and perhaps even from expatriates. The UK, unlike the US, has always fought shy of trying to tax its expatriates (on anything other than UK source income) but there was the temptation. Mercifully, Mr Osborne has resisted that.

The detailed part of the Budget does throw up two items of interest for Britons living overseas, and non Britons thinking of coming to live in the UK.

Firstly, a statutory residence test. It is fair to say that the whole question of whether or not someone is resident or not has become far too imprecise. This year’s Budget states the need for a consultation on the introduction of a clear set of rules – rather than having to rely on old cases and Revenue practice, which is the current state of affairs. In many ways clear rules would make life easier but of course it depends on the basis of the test. At this stage all we can do is wait and see.

Secondly, domicile. At present, those non doms based in the UK can retain the remittance basis of taxation beyond seven years residence in the UK by paying a £30,000 annual charge. That seems set to increase to £50,000 for those who have been resident for 12 or more years.

It is already true that you need to be “fairly wealthy” to make claiming the remittance basis worthwhile, and so moving the charge to £50,000 is unlikely to make much difference either to the amount that the Government raises in revenue or to the attraction of the UK to “non doms”.

The UK Budget was announced on Wednesday 23rd March 2011. For an overview of the main points please read our UK Budget Summary 2011 and our UK Tax Tables 2011.

To follow is an attempt to summarise the reasons why those planning to return to the UK at some point might consider using a life wrapper (also known as an offshore or insurance bond).

Rather bizarrely, holding investments in an insurance bond – rather than directly – produces a different tax result. This might be helpful and of course comes at some cost. Those notes can only give background rather than advice but hopefully they will be helpful.

Let us start with the tax treatment. Probably the best known feature of life wrappers is the ability to take 5% of the original investment whilst UK resident without liability at that time. Bond holders can store up the 5% and withdraw a lump sum if they prefer. So, after five years, where no other withdrawals had been made an investor could draw out 25%.

Nothing though is for nothing. After the investor has had 100% of the original investment returned all other drawings are fully taxable as income. Clearly the 5% gives an immediate advantage but can carry a “sting in the tail”.

Bonds can be used more effectively in other ways. First, where a non resident owner has owned a bond for some years prior to living in the UK that period of time can reduce any eventual tax. More on this topic, and on using highly personalised bonds, is available – please do get in touch for more detail.

Secondly, where the owner has sufficient capital then future capital gains tax could be a concern. Switches between assets held in a bond do not attract UK capital gains tax. On the other hand, holding assets in a bond does not allow the owner to take advantage of the capital gains tax exemption in the UK. That allows GBP10,200 of profit to be realised without any tax at all.

Although using a bond is often a sensible step, the question is how much and when to start?

The answer to ‘how much’ depends on the amount of capital available and likely income needs. ‘When’ is easier – sooner is better.

When considering investments, most wrapper providers now allow access to a large range of individual funds, and some will allow individual stocks or for a portfolio to be managed by a discretionary manager.

The wrapper has the advantage of allowing switches without the owner having to produce more anti-money laundering paperwork at every stage – making life just that little bit easier. But the same benefit is available through non-life platforms.

Other factors to ponder will include security and cost. Just because the assets are held via a life company, often one with a prestigious name, it does not automatically lead to greater security. Do bear in mind though that your assets would not usually be a part of the life company’s assets so if it ‘gets into trouble’ your assets remain yours.

Cost is the big bugbear with these wrappers. All too often, greedy advisers use them as a means of disguising initial commissions as high as 7% (and tales abound of 11% in one recent example). That is more a criticism of the adviser than the wrapper. Even with a reputable adviser a bond will add an extra layer of charge but that need not be overly high and can actually bring savings in the costs of management on the underlying funds.

Hopefully this summary will help in understanding more about life wrappers. They can certainly help in tax planning but are just one of a range of tools available. There is rarely one right answer to a problem as complex as reducing tax, and running an effective investment portfolio but wrappers do deserve consideration.

The UK and Hong Kong governments have signed the first comprehensive double taxation treaty. For UK income and capital gains tax purposes it comes into force on 6th April 2011. To follow is a brief outline of the main implications for UK resident taxpayers who have financial interests in Hong Kong.

Hong Kong Pension Income
The treaty contains wonderful news for those who receive a pension from Hong Kong sources, where the pension was derived from employment or self-employment. From 6th April 2011 all such Hong Kong pension income will be subject to tax only in Hong Kong and will be specifically exempt from income tax in the UK. There is no requirement for Hong Kong tax to be paid on the income in order for it to be exempt in the UK.

This is excellent news for two reasons. Firstly, the rate of tax charged in Hong Kong is usually much lower than in the UK. Secondly, by exempting this source of pension income from the UK, other sources of income may be taxed at lower rates in the UK.

For example, if you have been a higher rate taxpayer in the UK on your Hong Kong pension, any investment income you have enjoyed also suffered tax at the higher rate. By removing the Hong Kong pension from tax it may be that the investment income becomes taxable at a lower rate.

Also, any income from a Hong Kong QROPS (Qualifying Recognised Overseas Pension Scheme) should also be exempt from tax in the UK. Indeed, if you receive income from a QROPS anywhere else in the world, it could be worth considering a transfer of those rights into a Hong Kong based QROPS. Do get in touch for more information.

Interest, Dividends, Capital Gains and Other Income
For a UK resident taxpayer who is not also resident in Hong Kong, the treaty establishes the UK as having the primary right to tax income and gains, even if they arise in Hong Kong (subject to one or two minor exceptions).

Employment Income
If you are resident in the UK, employment income relating to duties performed in Hong Kong is taxable only in the UK and is exempt from salaries tax in Hong Kong. However, if certain conditions are met, any earnings relating to Hong Kong performed duties can be subject to tax there. Individual advice is vital here.

For UK resident aircrew of a Hong Kong based airline, the treaty indicates that earnings would remain liable to UK income tax. Although the treaty does imply that Hong Kong has a theoretical right to tax those earnings, the wording is clear in that it does not pass the exclusive taxing right to Hong Kong. Sadly, as a consequence it appears that earnings remain within the reach of UK income tax, albeit with a credit for any Hong Kong tax paid in respect of duties performed there.

Tax Credit Relief
If Hong Kong tax has been paid on income or gains which also need to be reported in a UK tax return, then credit will be given against the UK tax liability for the Hong Kong tax paid.

‘Treaty Residence’
The treaty talks in terms of someone being ‘resident’ in one country or the other. In certain circumstances it is possible to argue that you might be ‘treaty resident’ in Hong Kong, which could reduce exposure to UK tax on investment income and capital gains. Do let us know if you think that your centre of vital interests is located in Hong Kong rather than the UK and we will be happy to offer further advice.

As with every double tax treaty, the devil is in the detail. If you would like more information, please get in touch.

Expatriates planning their investment strategies are often advised to use a life insurance bond. We look at why – and, more interestingly, how to achieve a tax advantage.

A bond issued by a non-UK (offshore) insurance company offers two principle advantages:-

1 – Many separate investments can all be held in one simple package. Switching between funds is straightforward.

2 – Often the tax treatment of the bond is different from that applying to the underlying assets. For example, if a UK resident holds cash on deposit then tax is payable on the interest. When holding that same deposit in a bond, no UK tax is payable until a withdrawal is taken – and even then 5% of the original investment can be drawn without tax at that time.

Unfortunately, unscrupulous advisers can use bonds to generate extremely high levels of commission. This has given bonds a bad press – but as a planning tool they certainly have their place in any tax adviser’s armoury.

Indeed, starting an offshore bond sooner rather than later can make a good deal of sense. That is due to “time apportionment relief”. For example, if you had started a bond in 2000, returned to the UK in 2010 and decided to surrender the whole of the bond in 2011, tax would only have to be paid on one eleventh of the gain. What is particularly attractive is that this relief applies even where the bond has been built up by a number of contributions over many years. So, if you are not able to invest a lump sum but can afford to build up to that lump sum by regular contributions, then the whole of the value in your bond still attracts that beneficial tax treatment.

That is quite convenient as most of us save from earnings, with perhaps the occasional bonus, and simply do not have large lump sums of capital until close to retiring, or just returning back to the UK.

In that case, we can arrange for a bond to accept contributions over a long period of time so it becomes a good home for savings at the same time as you build up a tax advantage. You do need to be careful though about the charges – expatriates wanting to save regularly is a frequent receipt for “rip offs”.

Of course, the same logic applies if you happen to have a larger lump sum. Again, you need to be wary of the level of commission being charged. We are here to help you assess whether a bond is likely to be effective in your own circumstances.

So, overall, bonds are well worth a look when you are tax-planning (but be careful of the commission) and it can make sense to start sooner rather than later.

Bonds therefore have their place in the expatriate’s investment portfolio. For more information on planning your finances so that you benefit more from your savings please get in touch.

It always seems customary at this time of year to give predictions of the year ahead. Here at The Fry Group we are inundated with the latest thinking from many of the financial world’s key players, and part of our role for clients is to try and make some sense of all of the information. To follow are the, very broad, opinions of a few of the UK’s leading fund houses:

Interest rates are likely to rise in the second half of 2011, but any increase should be minimal – no more than 0.75%.

Equities will be up over the year but the ride may very well be a bit ‘lumpy’

Fixed interest, especially government debt, is likely to be down over the year

There is no consensus about commodities – which receive a fairly even split across all fund houses of up/down or flat

The demise of the Euro in its current state is possible, but difficult to predict given it is primarily a political decision and eventually it may be that there is too much pain for the public in each country to take.

As with any forecasting, it is wise to remember that the points above offer a very broad view. The economic climate has stablised in the last few months, and some economists are talking about positive, double-digit returns being available in 2011, but it is vital that any financial planning takes into consideration your own aims, objectives and attitude to risk. Being a Fry client ensures you have access to managers who can guide you sensibly and ensure that your money is invested in funds that are robust enough to navigate the future. Do talk to us about your individual circumstances and investment aims.

For more information please contact us.

For months the UK Press has reported that thousands of wealthy Britons will actually leave the UK as the burden of taxation increases. For British expatriates who are moving back to the UK the question must be whether they will face financial hardship or ruin on their return to British soil. After all, with the top rate of income tax now set at 50%, will the result be a huge bill to the taxman?

It makes sense to start by looking at how harsh the UK’s tax environment will become. The headlines tell us that those earning more than £150,000 per annum will pay 50% of their income to the tax man. What of those earning more realistic salaries or, crucially in this context, enjoying substantial pensions?

Here is the first example. A UK resident earning or receiving a pension of £80,000 per annum will pay income tax of £21,930 (an average tax ‘hit’ of 27.4%) resulting in a net income of £58,070. Of course, the Government will take more of that through VAT, Council Tax and so forth but let’s stick to basics. In truth, most European countries will tax income at roughly the same rate – if not more – although some (Cyprus for example) have much lower rates. However, the decision to live in Cyprus is more of a lifestyle choice.

Younger expatriates planning their return to the UK can do very little to reduce the burden of income tax on their eventual salaries other than by saving tax-efficiently. Those expatriates who will receive a pension might be able to reduce the eventual income tax charge via the Foreign Pension Allowance which can exempt 10% of the income from tax in particular circumstances. It might be possible, subject to scheme rules, for that pensioner to commute a lump sum and, in terms of tax planning at least, that could be a sensible step.

This second example explains why. An expatriate couple have built up their capital over the years and have a total of £2 million invested in a mix of property, bonds and cash deposits. Overall that capital generates a yield of 4% or £80,000 per annum. With some basic tax planning (holding assets jointly) they will pay £10,410 of income tax – an average rate of 13%. So the retired couple with £80,000 of investment income will pay £10,410 of income tax whilst the person enjoying a similar salary will pay an extra £11,520 of income tax (and that’s before we take National Insurance into the reckoning).

What’s more, with some further planning that income tax liability could be reduced even further. For example, income tax could be cut to £8,000 (an average rate of just 10%) with net income being £72,000.

So, whilst we should pity the working Briton the conclusion is that those retiring in the UK are able to plan for a much lower contribution to the taxman. Of course there is still the extra burden of VAT, excise duty on wine and tax on air travel to contend with, but at least these examples will show that all is not as bad as the press might have us fear.

Our example shows the situation for a couple with substantial assets – but do remember that good planning can help whatever your situation. Ultimately, our service ensures you can enjoy more of your own wealth. If you would like us to help you save tax please get in touch.