Welcome to my world – and the four letter word that sends a chill down most people’s spine: HMRC. A world where justice and taxation are not just in different countries, but on different continents. And, sadly, where thousands of British expats are living under the shadow of a ticking time bomb because of arrangements made with their pensions and life savings.
A few people are aware of the tax disaster that awaits them. But the majority have absolutely no idea and it is going to hit them as a devastating shock – whether from HMRC or their local tax authorities (or, in some cases, both).
Up to 2012, expats were routinely sending their pensions off to New Zealand – to the Superlife and Southern Star QROPS – and then busting 100% out. After the rules changed in April 2012, Stephen Ward set up the Evergreen QROPS/Marazion loan scam and up to 300 people bust 50% of their pensions out. It remains to be seen how the Spanish tax authorities will treat all these payments. It is unlikely to be pleasant for those affected.
For expats in Spain, the outlook can be grim. If there is a debt with HMRC for tax – say an unauthorised pension payment @ 55% – HMRC can send the debt to the Spanish Tributaria and they can then enforce the payment. If we think that HMRC is heartless, the Tributaria makes them look like the Sally Army. If a tax debt is unpaid, they will just have your bank account frozen and can also put your house up for auction.
In the Continental Wealth Management scam, large numbers of victims were paid compensation for the destruction of their pension funds by investing them in high-risk, toxic structured notes from firms such as Leonteq. But CWM had not bargained for the fact that in Spain the Tributaria would deem this to be taxable income – and the victims had a terrible surprise when the money they had used up to live on attracted a hefty tax bill for which they hadn’t budgeted.
Which brings me to Portfolio Bonds in general – and the SEB Life International “Spanish” one in particular. Many victims are fooled into thinking that because this product is heralded as “Spanish Compliant” that there is some degree of safety or security. There isn’t. SEB’s Spanish Portfolio bond is compliant from the Tributaria’s point of view because it reports annually on growth of the portfolio for tax purposes. However, that is all there is to it. And it is a waste of time anyway, because there often isn’t any growth – only loss. The huge quarterly charges by SEB erode any growth – and if toxic Leonteq structured notes have been used, there will be destruction of most or even all of the fund.
The Continental Wealth Management scandal – along with similar scams run by firms such as Holborn Assets – should have taught the industry conclusively that insurance bonds should not be used for pensions. They are too expensive and inflexible. The quarterly charges do increase when the fund value increases, but they don’t decrease when the fund is impaired – or even destroyed entirely. I have one member whose fund has gone from £250k to minus £57k as SEB simply kept taking their fees long after the fund was worthless.
An insurance bond (Personalised Portfolio Bond) can be used by an individual as an investment wrapper outside of the UK. This can be useful and tax efficient offshore. But when the investor goes back to the UK, there is a tax nightmare. Personalised Portfolio Bonds come under anti-avoidance legislation in the UK!
The horrible surprise that the investor will get upon returning to British soil is that HMRC can assume a deemed gain even if there is no gain at all, and charge tax on it. It is known often as the 15/15/15 rule and it leads to taxation even where the fund within the bond is losing money.
This situation only applies to investments within the Personalised Portfolio Bonds, selected by the policyholder, where the policyholder is a UK tax resident. The tax payable is at the policyholder’s highest rate. Even worse, the supposed tax efficiency of investment bonds does not work as top slicing relief (which normally lessens the blow and is often the cited reason for these bonds when sold to non-UK investors) does not apply to Personalised Portfolio Bonds.
Most people assume that tax is applied to actual gains made by the overall fund. And few offshore advisers have heard of the tax rules which apply in this situation (The Income Tax, Trading and other Income Act (ITTOIA) 2005 Sections 515 to 526). The devasting effect of this on an expat returning home is that the rules assume an annual gain of 15% of both the initial premium and the cumulative actual gains from the date the bond was established.