UK expats little hurt by budget
BRITISH expatriates emerged surprisingly unscathed by tax provisions unveiled in the Labour government's new budget.
However, tax planning will be trickier for those returning home, and the tax regime has become less generous for future British expatriates.
'We rather believed that the Labour Party, having been out of power for so long, would have stored up a great number of anti-avoidance measures that they wanted to bring in,' Price Waterhouse tax partner Mark Annesley said.
'Actually, there aren't as many anti-avoidance measures in this Budget as we thought there were going to be.' Among the most important changes affecting Britons in Hong Kong are elimination of the deduction for foreign-earned income, tougher capital-gains rules for taxpayers temporarily non-resident in Britain, and harsh new treatment for personal-portfolio bonds.
Expats on short-term contracts will lose the foreign-earned-income deduction immediately.
In the past, British residents away from the country for more than 365 days but not spanning a full tax year (April 6 to April 5) could deduct 100 per cent of overseas earnings.
That provision has been wiped from the books as of Wednesday, and short-termers whose contract year does not coincide with the tax year will feel the pinch.
'This 'Welcome home!' from Inland Revenue is not going to be popular with expatriates,' said James Clemence, senior manager of Coopers & Lybrand's personal-tax division.
Prior to the budget, only British residents were subject to capital-gains tax, a system that made it easy to avoid tax on large gains simply by leaving the country for at least one full tax year.
Now, it will be necessary to remain non-resident for at least five years, or four out of seven tax years.
Gains realised in the year of departure will be taxed in that year; other gains will be taxed in the year of return.
This means tax planning for a return to Britain needs to be started much earlier than before.
In a related matter, 'bed and breakfasting' - realising a gain or loss by selling an investment late one day and buying it back the next morning - has become more difficult.
Breakfast now must be put off for at least 30 days, making this strategy much less attractive in a world where stock prices can move dramatically in minutes and hours.
The capital-gains tax itself has been graduated, with less of the gain subject to tax the longer the investment is held.
For example, this can reduce the actual gains-tax rate of 40 per cent to an effective rate of 10 per cent on some assets held for 10 years or more.
Personal portfolio bonds, a type of insurance policy with a heavy investment element and a limited life-assurance element, formerly were used to defer tax on income and gains arising within the bond.
Now, these bonds will be subject to an annual charge based on premiums paid rather than the value of the bond. This fee will be in addition to charges assessed when the bond is sold or redeemed.
Edsaco Horwath Tax director Deborah Annells said owners of personal-portfolio bonds should consider switching to pooled insurance bonds, which were not subject to the same treatment.
