Tony Clements is an IFA with Park Row Corporate and Private Clients
Over the last few months I have spent some time talking about the tax treatment of UK resident non domicile investments, and how offshore bonds can legitimately be used to shelter income arising from immediate assessment by HMRC.
However, as you might remember we have had a budget in the meantime. On the 26 April 2009, Darling took to the floor and drove a stake through the heart of retirement planning for the high earner.
The implications between now and April 2011 for those earning over £150,000 has by now been well documented and I do not propose to spend time listing the changes, but I thought it might be worth focusing on some of the planning issues we need to be aware of as advisers, and how that might relate to the UK resident non domicile client.
Relevant income. Advisers should familiarise themselves with the definition of relevant earnings. It is the relevant earnings, including the likes of property income and investment bond proceeds, of over £150,000 in this or the last two tax years that trigger the special allowance charge applying to pension contributions.
Relevant income can be reduced by:
- Making a gift aid qualifying charitable donation.
- If income in previous years has been below £150,000 but current year may exceed £150,000 threshold, reducing income generated from investments. Clearly this further extols the use of the offshore bond for the UK resident non domicile.
- Transferring income from the main recipient of income to the partner. Again this will only work if previous years income is below the threshold.
Special annual allowance charge. It must be remembered that for this and next year, the first £20,000 of pension contributions are not subject to the special annual allowance charge.
It is important to be aware that the tax relief has not actually been removed, but a special annual allowance charge of 20% introduced for those with relevant income of over £150,000 on pension contributions of over £20,000 in each tax year.
So for those UK res non doms with significant pension funds already accrued, assuming previous contributions are not exempt by being qualifying regular contributions, then consideration should be given to any pension funding at all. If retirement and/or future job prospects are likely to be non UK based, then an accrued fund from two £20,000 contributions may not be significant enough for the fund to be cost effectively managed when they leave the UK, either remaining in the UK or transferring to a QROPS.
Thinking ahead. In every case, part of our role as advisers is to consider the implications of our advice at some point in the future.
For many high earners, including UK res non doms, these regulatory changes will close the use of pensions for retirement planning, but it will bring in to focus other strategies.
Offshore bond providers were probably the only group that welcomed the 2009 Budget. Moving funds to a pension sheltered the growth and income from HMRC until retirement at least, but now many high earners are asking why they would give away access to their capital for 20% tax relief? Can they shelter the growth or income elsewhere? Yes, use an offshore bond.
The providers of UK income tax planning schemes such as film partnerships will be anticipating an increase of interest in their products. The usual balancing act between tax scheme and pension planning has all but gone. Many tax schemes have implications for res non doms if they move overseas, which the adviser needs to be aware of before recommendation.
And there are some that will still want to use pensions, despite the 20% special annual allowance charge. Some just like the discipline of ring fencing their retirement pot, and will take a net 20% tax relief as being better than none - they might be in the minority but they exist.
As ever any change in legislation, particularly one as involved as this, with prospect of further alteration in 2011, reinforces the desire from res non dom clients, like others, to receive relevant, bespoke advice that the informed IFA is best placed to offer.
Partner Insight Video: Advisers have had to adapt to the changing investment landscape.
Investment trust savings scheme