Heather Churchill said she 'must be the only person I know not to have profited from property'
For the past three-and-a-half
years Heather Churchill has been enjoying the weather and a tax-free
salary as an expat in Dubai. After serving with the RAF for 25 years she
now works in the Middle Eastern city as an air navigation instructor.
Ms Churchill, 46, is paid £95,000 a year – 30pc of which is her
salary, while the rest consists of benefits such as an accommodation
allowance and free flights home. She uses her full allowance of £25,000
to rent a two-bed property in the upmarket Dubai Marina.
Her employment package may be
attractive, but her job is unstable. The contract is renewed annually
and she gives herself five more years in the job, after which she will
return to Britain to retire or work part-time as an aviation consultant.
Ms Churchill receives £11,000 a year from her RAF pension. She lets
her two-bedroom terrace property in Lincoln, which is mortgage-free, for
£500 a month. The property was bought in 2005 for £104,000 and Ms
Churchill estimates its current worth at £105,000. She said she “must be
the only person I know not to have profited from property”.
Ms Churchill, who used to be in the RAF, wants to continue travelling when she retires
She does not want to retire to
her Lincoln house but may want to buy another home to live in. She
recently put £50,000 in Premium Bonds. She also has £40,000 in an HSBC
account in Dubai and £18,000 with Bank of Scotland.
Ms Churchill is able to save £5,000 a month but feels that her cash
is just “sat in the bank doing nothing”. She would like to know how to
get the best return. She almost invested £50,000 for 10 years through an
adviser but when it came to sign she balked at the £16,000 fees.
She would like to have enough money when she returns to the UK to retire mortgage free and go travelling.
Jonothan McColgan, a chartered financial planner at Combined Financial Strategies, said:
The first £11,000 falls within
her personal allowance, Premium Bond wins are tax-free and savings
interest will be paid gross, with tax due only should Ms Churchill’s
total income exceed £17,000 and UK interest exceed £1,000 at the same
time. So it is very likely that she will have no tax to pay on her UK
interest.
However, her rent (after allowable deductions) would be liable to
income tax. Therefore, it is important that she declares it on her tax
return. If she has not been declaring her rental income, HMRC could go
back up to six years and add penalties and interest.
Although Ms Churchill does not think her Lincoln property has
appreciated very much it is generating a pretty impressive income of
5.7pc a year, based on her valuation of £105,000. I checked the postcode
of the property on Zoopla, which suggested it could be worth £124,000.
If she waited to sell the property on her return there would probably
be a tax bill of about £1,500 (based on the Zoopla value). Ms Churchill
said she did not want to live in the Lincoln property but might want to
buy another.
It could prove difficult to keep both as any residential property
would require UK earnings to justify a mortgage. If you are employed,
lenders will require you to be through your probation period. If Ms
Churchill became a self-employed consultant she would need about three
years’ accounts before any reasonable lender would be willing to offer
her a mortgage.
Therefore, she would probably have to sell her Lincoln property to finance any other property purchase.
Ms Churchill is keen to invest. However, with her job under increased
uncertainty she would need to make sure she has plenty of accessible
cash in case she needs to return home earlier than expected. She may
want to consider a savings vehicle such as an offshore investment bond.
There would be no liability to taxes on income, dividends or capital
gains while the money remains invested, even when Ms Churchill returns
to the UK. She could withdraw 5pc of the original investment every year
for a maximum of 20 years. If she did not make any withdrawals these
sums could roll forward to allow a larger one-off withdrawal.
If Ms Churchill disposed of this investment after returning to
Britain, any gain would attract income tax rather than capital gains
tax. Income tax is usually higher, especially as her Forces pension uses
her whole personal allowance.
Ms Churchill has been enjoying the expat lifestyle for three and a half years but is not guaranteed job security.
She would not pay tax for the
times she was not residing in the UK. This would give her a great
opportunity to sell the investment either just before or just after
returning home, as she would probably want to start using more
tax-efficient vehicles such as Isas on her return.
A relatively new type of investment is exchange-traded funds (ETFs).
They are in effect low-cost “index tracker” funds, replicating the
performance of your chosen investment market.
Ms Churchill’s main consideration at the moment is UK taxation. Even
though she is currently a non-resident she is still liable for UK tax on
any income in Britain. While her Dubai income is exempt, the income
from her pension, rent and savings interest is not.
However, if Ms Churchill is
unable to decide on which markets to invest in, ETFs might not be
appropriate. An investment of £50,000 over 10 years using these funds
would cost around £8,000, based on annual returns of 3.8pc a year. This
is half what Ms Churchill was previously quoted.
Examples of these funds are Vanguard’s LifeStrategy range, 7IM’s AAP range and the MA Passive range from Architas.
Russ Mould, investment director at AJ Bell, said:
With life expectancy on the increase, taking early retirement needs
careful consideration and living overseas creates additional
complexities. It would be worth checking what Ms Churchill’s UK state
pension age will be and getting a pension forecast from gov.uk.
If she returns to work in the UK, she will restart building up NI
credits for the state pension. It is a complex calculation but the
amount she will get is based on her NI record before she moved to Dubai
plus about £4.45 a week of state pension for each qualifying year that
she works after returning from Dubai.
If Ms Churchill decided to take
on a part-time role she would also be able to contribute to a UK pension
and receive contributions from the Government in the form of tax
relief. The annual limit on pension contributions is £40,000 and she
must have annual earnings of at least the amount she has put in.
If she is not earning, the maximum she could contribute is £2,800, or
£3,600 once basic-rate tax relief has been added. In addition,
depending on what work Ms Churchill decided to do, she might have access
to a company pension and receive contributions from her new employer.
Turning to her private savings, there are a number of issues to be
aware of. Access to Britain’s mainstream tax-efficient savings vehicles
is restricted for those who live overseas. Someone can save new funds
into an Isa only if they are UK-resident.
If someone moves abroad they can continue to save into a pension for
five years after ceasing to have UK earnings, but they can save only
£3,600 a year.
Some UK investment platforms may
allow Ms Churchill to open a non-tax-advantaged general trading account
but each will have its own rules.
Even if they do accept overseas business there will potentially be
complications around anti-money laundering regulations and there could
also be complications around liabilities for tax on gains, income etc in
both the UK and the country of residence.
One potential option is an offshore bond. These do not suffer the
restrictions of UK-based savings products. Given their additional
flexibility and complexity they can be more expensive. It is worth
keeping a close eye on fund fees because they can be one of the most
significant drags on how investments perform.
For example, an actively managed global equity fund might have an
annual charge of around 1.1pc, but there are cheaper passive options,
such as the iShares Core MSCI World ETF, which costs 0.2pc a year.
It may also be worth looking at investment trusts. For example, the
Scottish Mortgage trust is an actively managed global equity portfolio
and has an annual charge of 0.45pc.
Have you got a financial dilemma or want help reaching a financial goal? Get in touchCredit:
Warren Allott.
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