Heading for an eastern tax promise

Richard and Esther Taylor
Ages: He is 27, she 28
Live: in Nottingham
Occupation: Teachers
Earn: ?43,000 combined
Mortgages: ?50,000 and ?37,000
Debts: ?9,600 student loans
Investments: Rental property, Isa
Pensions: Teachers Superannuation Scheme
Aims: To work in Asia

Richard and Esther live in a Victorian cottage in a Nottingham commuter belt just outside the rush of the city. They hope to take advantage of this desirable location by renting out the house and going to work in the Far East.

Richard teaches maths, and Esther teaches English and Spanish. 'We are fairly confident of getting work as we teach employable subjects,' Richard says. 'But of course we cannot be certain until we have offers, and teaching jobs in Asia are advertised from December to March.'

Their plan is to move to Singapore or Bangkok, where taxes are low: 'We will go next summer for two to three years.' They expect to earn about the same as they do now, which means they must keep repaying their student loans. They do not mind because it was a cheap form of finance.

'While my wife was doing teacher training, we used the student loan to buy double glazing and a computer.'

The move involves reorganising their finances, although they are in quite a comfortable position. Aside from the house they live in, Richard owns a flat that he lets to students. It is left from his own student days. He receives a gross rent of £645 a month for 10 months of the year. He has an interest-only mortgage of £37,000, which costs £235 a month, and he pays £45 into two Invesco Perpetual Isas.

Richard would like to pay off this mortgage in the next 10 years: 'I might then sell the property, or I might keep it going for the rent.'

Together they have a £50,000 repayment mortgage on their own home, which is worth about £78,000. They can rent the cottage for £550 to £600 a month gross. Both mortgages are covered by term insurance, and the penalty periods on both expire at about the time they will leave. Richard would like to negotiate cheaper loans but wonders if they might have to convert to a buy-to-let loan.

Each month they have about £1,000 surplus cash and, in the Far East, should have even more as they will pay less tax and probably get accommodation included with their jobs: 'My musings and questions surround what to do with the surplus cash. Perhaps we should sit on this in case there are costs involved with moving that we don't know about.'

Or should they invest in more Isas, reduce their mortgage, repay the student debt or boost their pension?

The jobs will include private health insurance, but not pension contributions, although a 10 per cent bonus at the end of the contract, about £7,000, compensates.

Much as they love the cottage, the chances of moving back into it when they return are low as they will want a bigger house or might live in a different area.

But it is highly rentable, and they want to keep it. 'We don't want to sell it, ever.' says Richard.

Adviser 1: Steve Travis

If Richard and Esther go abroad for more than
one complete tax year, all their overseas income
will be outside UK tax. If they sold the student
property within five years of leaving, it would still
be subject to UK capital gains tax.

Even as non-residents they keep their tax-free
personal allowances, which should largely
extinguish tax due on the rent. On leaving, they
must apply to the Inland Revenue Foreign
Intermediaries & Claims Office in Bootle to ensure
no tax is deducted from the rent by students or
agents.

They do not have to switch to a buy-to-let
mortgage, although the lenders might load their
existing interest by 1 per cent. If so, they can
remortgage. Mortgage interest can be offset as a
business expense. I rec ommend making
maximum additional voluntary contributions to
their pension scheme until they leave, and then
paying ?2 a week in voluntary national insurance
contributions.

They should build a cash reserve of six months'
salaries and start saving straight away in
Rothschild's offshore cash roll-up fund for
immediate gross interest.

They cannot contribute to Isas as non-residents,
so might make a one-off lump sum payment
beforehand as existing investments stay tax free.
Thereafter, I recommend a selection of UK and
international unit trusts for savings and mortgage
repayment. Units acquired after they leave will be
free of capital gains tax while they are
non-resident.

Steve Travis is overseas manager with adviser
Wilfred T Fry.

Adviser 2: Keith Barber

While they are still in the UK, Richard and Esther
should consider a remortgage to a flexible
buy-to-let loan at interest of around 5.75 per cent.
This should save about ?57 a month.

To repay the loan within 10 years, some of the
profit from the rental needs to be saved. Rather
than convert to a repayment mortgage, they can
maintain flexibility by putting the difference
between repayment and interest-only payments,
about ?235 a month, into an offshore deposit
account. When they return, this can be used to
reduce the loan.

As they are living in the cottage until they leave,
there should not be any capital gains tax when
they come back unless they do not return to this
property. Reoccupying for a short time may be
safest. Shortly before leav ing they need to tell
their lender and insurance company. Normally
the worst is that the lender will move them to its
standard rate.

If the excess cash is to help buy another property
on their return, it should go into an offshore
deposit account. They should consider investment
products only if the money can be left for five
years or more. Off-shore products tend to be more
expensive than UK-based investments, so they
should look for onshore unit trusts and
open-ended investment companies.

They must close the offshore accounts to
capitalise interest shortly before their permanent
return.

Keith Barber is a consultancy manager at Sedgwick
Independent Financial Consultants.

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