The ever-increasing number of UK inpats have various tax planning opportunities available to them
According to Coutts Bank, the strength of the economy and the high value of the pound have made the UK very attractive to overseas executives and foreign nationals who move to the UK to live and work. Coutts estimates that over the past decade, the number of these "executive inpats" has more than doubled.
An important consideration for these high flyers is that although they will be a UK resident many of them will be domiciled elsewhere for income tax and capital gains tax purposes. This lends itself to a number of tax planning opportunities.
First, and foremost, any income and gains that arose before the non-domiciled individual first arrived in the UK will be outside the scope of UK income tax and capital gains tax, even if they are subsequently remitted - in other words, brought onshore. Individuals in this position should consider ring-fencing offshore assets owned before UK entry as ones that can safely be remitted without triggering a tax liability.
While resident in the UK there is only a UK tax liability for most offshore assets to the extent that the income and/or gains occurring after entrance are remitted. In these circumstances, there are a number of measures that these 'inpats' can undertake to mitigate their UK tax liabilities.
The dual offshore account approach is simple but effective. Account One contains deposits that the individual owned before coming to the UK, and is therefore not taxable if remitted. Interest earned on this account is credited to a separate account - Account Two. Providing the money in Account Two is kept offshore, there is no UK income tax to pay. Were the individual to have only one account to which all interest earned was credited, then Inland Revenue practice is to treat any remittance from that account as one of taxable income before capital.
The dual account approach will not work for capital gains. When a capital gain occurs on an offshore asset after the individual has entered the UK, a proportion of that gain will be taxable whenever proceeds from the sale are remitted (even if the proceeds have been converted into another asset). However, with careful planning, the individual can bring onshore sufficient proceeds each tax year to remit capital gains that just use up their annual exemption but do not cause a tax liability. This effectively washes out some of the gain and the proceeds can then be returned offshore as pure capital. Incidentally, offshore capital losses cannot be remitted.
One method of ring-fencing pre-entry income and gains, and capital from which gains have been washed out, is to use an offshore life insurance investment bond. The open architecture of a bond can provide a vast array of funds to choose from, and apart from any non-repayable withholding tax, the investor can have the benefit of gross roll-up. Moreover, while assets are held within the wrapper it is not necessary for the investor to keep track of the income and gains for remittance purposes.
Providing the bond has not been funded with income and gains that occurred after the individual arrived in the UK and the underlying assets of the bond do not fall foul of the personal portfolio bond regulations, there will be no UK tax liability until there is a chargeable event.
Investment bonds will not be suitable for all circumstances, particularly for individuals who may be planning to move back to a country where the tax treatment is not so favourable.
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