A Case Study of Capital International’s Kinesis Service

Is Situs a Slient Tax?

Often overlooked or misunderstood, so called “situs tax” is the phenomenon of taxation imposed on assets based on their location or situs as opposed to the taxpayer’s residence or domicilium.

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With some investors being simply unaware of its ramifications, it can indeed pose a significant risk to global citizens, especially when acquiring UK or US assets as part of their investment portfolios.

These potential risks arise when determining the situs of certain assets, especially intangible assets such as shares, bonds, or intellectual property.  This process can be complex and can require expert advice and reference to case law, statutory guidelines, and international treaties.

Although there are solutions to mitigate potential situs tax including the use of trusts, corporate vehicles and life bonds, these may come with the burden of additional costs, a loss of flexibility due to lock-in periods or a restriction on investment choices.

The following case study highlights how Capital International’s Kinesis Service recently assisted a Wealth Manager, and his client, to mitigate a potential situs tax liability on a substantial portfolio which held UK shares amongst other investments.

The high-net-worth client, an individual UK-expat, had accumulated over GBP1 million in UK shares, alongside other investments, over the course of several years.  

Although planning to retire in the UK in the future, the client is currently resident in the UAE: a jurisdiction with no Inheritance tax, Capital Gains Tax, nor Income Tax.  

The client had been unaware that upon his death, he faced a potential 40% tax liability on the value of the UK-listed shares, due to the situs of these assets being based in the UK.

The Solution: Capital International’s Kinesis Service  

After consulting with our Business Development team, the Wealth Manager opted to restructure the client’s holdings using Capital International’s Kinesis Service, due to the following benefits:  

• Easy Asset Reallocation: The UK shares, cash and other assets were transferred in-specie into a Custody Account held via Capital International’s investment platform.

• Situs Shift: The shares and assets are used to purchase a principal contract issued by Capital Financial Markets which creates a break in ownership between the individual and the underlying shares and assets, effectively removing/ mitigating the UK situs tax exposure.  Since the client is based in the UAE, this action results in no Capital Gains Tax consequences for the client.

• Flexibility Maintained: Unlike traditional trust structures or wrappers, the Kinesis Service allows the Wealth Manager to control and manage investment decisions within the principal contract; the portfolio can be adjusted without tie-in periods, global access is provided to all major asset classes and nil tax consequences should the client move back to the UK in the future.

• Cost Efficiency: The solution is implemented with minimal additional cost and the client avoided the complexity and expense of setting up offshore trusts or corporate wrappers.

Through the Kinesis Service, the Wealth Manager mitigated his client’s tax risk and maintained investment flexibility by accessing Capital International’s cost-effective and user-friendly international investment platform.

Furthermore, the client gained peace of mind, knowing his estate planning was aligned with his global investment strategy regardless of where he chooses to reside in the future.

Want to learn more?

If you or your clients hold UK or US assets and are concerned about potential situs tax exposure, Capital International’s Kinesis Service could be the solution.

To find out more about how Capital International may assist, please contact platform@capital-iom.com

Disclaimer: The views, thoughts and opinions expressed within this article are those of the author, and not those of Capital International Group Limited (Group) and/or any of its subsidiary companies and as such are neither given nor endorsed by the Group or any company within the Group. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Group to buy or sell any product or security or to make a bank deposit. Any reference to past performance is not necessarily a guide to the future. The value of investments may go down as well as up and may be adversely affected by currency fluctuations. The Group, its subsidiary companies, clients, and officers may have a position in, or engage in transactions in any of the investments mentioned. Opinions constitute views as at the date of issue thereof and are subject to change.

Capital International Limited is a subsidiary of Capital International Group Limited and is licensed by the Isle of Man Financial Services Authority. Capital International Limited is a member of the London Stock Exchange. Capital International, Capital International Asset Management, and Capital International Investment Platform are trading names of Capital International Limited.

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