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Where Taxpayers and Advisers Meet

Return of capital - to be declared, taxed?

thomasxerox
Posts:4
Joined:Thu Jan 21, 2021 4:40 pm
Return of capital - to be declared, taxed?

Postby thomasxerox » Thu Jan 21, 2021 6:41 pm

Hi everybody,

I'm a bit confused as to whether I should be paying tax on an investment I have in the EU, so I thought I'd ask on this forum, on the off-chance someone might know the answer.

So, I currently live in the UK and have an investment contract in Germany. My (EU-based) financial adviser has told me that this investment falls under the "return of capital" category and so, as a result, it is not taxable in the UK - or anywhere else (except in Germany, where I already pay taxes on this, which are deducted at source).

According to my financial adviser, there is nothing else to do, declare or pay anywhere else. However, my wife is freaking out as she seems pretty certain I should also be paying tax on this investment in the UK. Having very little financial knowledge and being completely unfamiliar with the UK tax system, I am unsure what to do.

Any help or advice would be greatly appreciated.

All the best,
Thom

ben_power
Posts:81
Joined:Tue Feb 27, 2018 8:34 pm

Re: Return of capital - to be declared, taxed?

Postby ben_power » Thu Jan 21, 2021 7:47 pm

Hi Thom,

It sounds like you might have an investment bond. The taxation will depend on a number of factors like where it was set up and your earnings upon surrender and any growth. In the UK you can have 'onshore' and 'offshore' investment bonds. Onshore bonds pay tax at 20% of all growth 'at source' (meaning on your behalf), without going onto detail this can be advantageous. Offshore bonds tend not to pay tax 'at source' but upon surrender you will pay income tax once the funds are brought back 'onshore', this can also be advantageous. Both bonds have pros/cons. Both may have other tax charges upon surrender dependent on the total growth and your tax rate. This can be complex so you should speak to a tax adviser as how you withdraw funds can play a significant part in the taxation.

If your investment is similar then the withdrawal can sometimes be deemed 'capital withdrawal/reduction' meaning you're taking back some of your original capital, this is normally restricted to 5% per annum without incurring tax charges but this can be rolled over so if you held the bond for 10 years and made no withdrawals you would have rolled over 50% you could withdraw of the original investment amount without a tax charge.

Full withdrawals may not incur a tax liability so your adviser should be able to offer advice. Personally, I would ask for specific details around what you have invested into which should have been provided when the investment was made. Ask for your adviser to provide a breakdown of the tax paid and tax due upon surrender but you'd be wise to speak to a qualified adviser who understands not just the type of investment but both UK and German taxation.


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