Many advisers may have found themselves with a new type of client on 6 April this year. It's not tha...
Many advisers may have found themselves with a new type of client on 6 April this year. It's not that they are new clients per se (they could have been advising this person for years); it's that these clients now need different advice. 'Non-doms' - people who are not UK domiciled but may have been resident in the UK for many years - face some new decisions on how to manage their tax affairs.
Non-doms were previously not taxed on any of their income or gains arising outside the UK (unless the money arising was sent to the UK in a year when they were resident in the UK for tax purposes). This meant they could arrange their affairs very tax-efficiently by splitting their money into income and capital, and only sending the capital to the UK. Capital was not taxed, which presented a considerable benefit and was known as the 'remittance' basis.
So potentially, you could be a millionaire, but as long as: a) you were a non-dom, and b) your income arose outside the UK and c) you didn't send it back to the UK, you could be paying less UK tax than a domiciled UK resident - as long as you didn't have any substantial income arising from your UK interests. (Although care had to be taken to ensure that any capital sent over didn't include any gains made on foreign assets, otherwise you could end up paying capital gains tax.)
What has changed?
Changes introduced in March's Budget mean:
- Depending on the length of time they have spent in the UK and their level of overseas wealth, non-doms can continue to pay only UK tax on income and gains on the remittance basis. However, this privilege will cost them £30,000 a year.
- Alternatively, non-doms can pay UK tax on their worldwide income on an arising basis. If they do, they will not then be liable for the £30,000 annual payment.
Also, non-doms who continue to be taxed on the remittance basis will cease to be eligible for certain exemptions in relation to income tax and capital gains tax - these include income tax personal allowance and the annual capital gains exemption.
It is possible to opt in and out of the remittance basis. For example, an individual can claim the remittance basis in one tax year and then have their foreign-source income and gains taxed in the UK on an arising basis for the following tax year.
Clients who are taxed on the remittance basis must identify specific foreign income and gains they wish the £30,000 levy to be set against. This foreign income (or gain) can then be remitted to the UK with no further tax liability. However, this can't be done until any other offshore income and gains arising in the same year have been remitted and tax paid in respect of them.
How can investing in an offshore bond help?
Essentially, offshore bonds are taxed only when they are cashed in. At that point, if a non-dom is still a UK resident, then as a higher-rate taxpayer they would pay 40% on gains, while someone in the basic-rate tax bracket must pay 20%. However, as a non-dom is particularly likely to move overseas, this can give them the potential to cash in the bond in a lower tax regime.
Non-doms can take an income of 5% a year from the bond with no immediate tax to pay - meaning they can draw a tax-deferred income without having to pay the £30,000 levy.
Using an offshore bond can also help a non-dom with estate planning. Used with an Excluded Property Trust, they can continue to keep an offshore bond outside their estate, even if they become UK-domiciled and therefore liable for inheritance tax in the future. They can still access money in the bond, without it giving them an inheritance tax problem.
One note of caution, however: if a non-dom invests unremitted foreign income and gains into an offshore bond and then uses the 5% withdrawal facility, this would give rise to a deemed remittance under anti-avoidance measures. However, if no withdrawals are made, this problem does not exist. Similarly, if no withdrawals are made until the non-dom becomes non-UK resident, then no UK taxation will apply at all.
- Ian Searle is business development manager at Standard Life International.
- Aegon Scottish Equitable International (Dublin) plc
- AIG Life International Limited
- Altraplan Assurance Luxembourg SA
- Axa Isle of Man Ltd
- London and Capital Life Ltd
- Canada Life Assurance Europe Ltd
- Canada Life International Ltd
- CMI Insurance Company Ltd
- CMI Insurance (Luxembourg) SA
- Commercial Union International SA
- Eagle Star Life Assurance Company of Ireland
- Eagle Star European Life Assurance Company Ltd
- Eagle Star (International Life) Ltd
- Fortuna Life Insurance Ltd
- Friends Provident International
- Friends Provident International (IoM)
- Generali International Ltd
- Global Life Ltd
- Hansard Europe Ltd
- Hansard International Ltd
- HSBC Life (Europe) Ltd
- ING Life Luxembourg SA
- IntegraLife International Ltd
- Irish Life International Ltd
- Isle of Man Assurance Ltd
- La Mondiale Europartner
- LCL International Life Assurance Company Ltd
- Legal & General International
- MGM International Assurance Ltd
- Monarch Assurance Plc
- Nordea Life & Pensions Ltd
- Nordea Life & Pensions SA
- Norwich Union International
- Prudential International Assurance Plc
- Quantum Leben AG
- Royal Skandia Life Assurance Ltd
- Scottish Life International
- Scottish Mutual International
- Scottish Provident International Life Assurance Ltd
- Skandia Lebensversicherung AG
- Skandia Life Ireland Ltd
- Standard Life International
- Standard Life Versicherung
- Zurich Financial Services (IoM) Ltd
- Zurich International Life Ltd.
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