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Tax planning for non doms

Offshore bonds may provide a solution for long term UK resident non doms who are currently paying, or who face paying, an annual Remittance Basis Charge. Read on to find out why.

Introduction

UK resident and domiciled individuals are generally liable to UK tax on their worldwide income and gains as they arise. This is known as the ‘arising basis’ of taxation.


However, where individuals are either:


  • UK resident but not UK domiciled (‘Non Doms’) or
  • UK resident but not ordinarily UK resident (regardless of their domicile),

they are able to claim an alternative tax treatment known as the ‘Remittance Basis’ of taxation.


The Remittance Basis

The remittance basis of taxation means tax is paid on UK sourced income and gains but tax is only paid on foreign income/gains if these are brought (‘remitted’) to the UK.


A remittance is any money or other property which is or which derives from offshore income and gains which are brought, either directly or indirectly, into the UK for an individual’s benefit or for the benefit of a ‘relevant’ person. There is also a remittance when a service provided in the UK to an individual or any other relevant person was paid for outside the UK with foreign income and/or gains.


If a person is:


Resident but not domiciled in the UK – they can use the remittance basis for both foreign income and foreign capital gains.


Resident and domiciled in the UK but not ordinarily resident - they can only use the remittance basis for foreign income only. Any foreign capital gains would be taxed on an arising basis.


Unremitted Foreign Income and/or Gains

Unremitted Foreign Income and/or Gains’ is a term which relates to any foreign income (and foreign gains if the individual is not domiciled in the UK) that arises (or accrues) during the tax year and which are not remitted to the UK but remain abroad. For example, if an individual had £50,000 of foreign income and gains in the tax year and they remitted £40,000 to the UK, their ‘unremitted’ foreign income and gains for the tax year would be £10,000.


Under £2,000 of unremitted foreign income and/or gains

If an individual has less than £2,000 unremitted foreign income and/or gains which arise or accrue in the relevant tax year, it is possible to use the Remittance Basis without making a claim or paying a charge, regardless of the length of time that person has been resident in the UK.


Over £2,000 of unremitted foreign income and/or gains

If an individual has £2,000 or more unremitted foreign income and/or gains arising or accruing in the relevant tax year and want to use the remittance basis, then they must make a claim for that year. Furthermore, if that individual has been resident in the UK for at least seven out of the nine years preceding the current or relevant tax year, there is a Remittance Basis Charge (RBC) of £30,000.


For those individuals who have been UK resident for at least twelve out of the previous fourteen years, the charge is increased to £50,000. The RBC is only payable by UK residents who are aged 18 or over at the end of the tax year and it is in addition to any UK tax liability.


Loss of Personal Allowances

Individuals who elect to use the remittance basis, automatically lose their entitlement to their Income Tax and Capital Gains Tax allowances. So even though a non ordinarily UK resident client cannot claim remittance on foreign capital gains, they still lose their CGT allowance.


The only exception to losing their personal allowances is for those individuals who are 'dual residents' – that is resident in the UK and also resident in another country under that country's rules. This exception does not affect all dual residents, only those who qualify for allowances under certain Double Taxation Agreements.


The fact that the charge can be offset against Income Tax or Capital Gains Tax (or a combination of the two), ensures that individuals who remit all of their foreign income and gains to the UK can receive credit for the charge against their UK liabilities. In order to obtain that relief, individuals have to make sure they make appropriate nominations of the income or gains upon which the RBC is paid.


To pay or not to pay!

People with substantial foreign income/gains may be better off paying the RBC but other individuals will need to do a comparison calculation to see which way they would be better off - taking into account levels of their income and gains and the loss of their personal allowance and annual exemption for Capital Gains Tax purposes.


The table below shows the figures (in bond italics) above which it would be worth paying the RBC as opposed to settling the income tax or capital gains tax bill. It must be remembered that it is essential to take into account the fact that the personal allowance/capital gains tax allowance would still be available if the client did not pay the RBC and must therefore be taken into consideration.


Income tax & the £30,000 charge
40% income tax payer 45% income tax payer
Amount of income at which 40% equates to the charge Personal Allowance if under 65 Amount of offshore income required to make paying the charge worthwhile Amount of income at which 45% equates to the charge Personal Allowance if under 65 Amount of offshore income required to make paying the charge worthwhile
£75,000 £9,440 £84,440 £66,666.66 £9,440 £76,106.66

Income tax & the £50,000 charge
40% income tax payer 45% income tax payer
Amount of income at which 40% equates to the charge Personal Allowance if under 65 Amount of offshore income required to make paying the charge worthwhile Amount of income at which 45% equates to the charge Personal Allowance if under 65 Amount of offshore income required to make paying the charge worthwhile
£125,000 £9,440 £134,440 £111,111.11 £9,440 £120,551.11

Capital gains tax
28% capital gains tax / £30,000 charge 28% capital gains tax / £50,000 charge
Amount of income at which 28% equates to the charge Individual Annual Exempt Amount Amount of offshore income required to make paying the charge worthwhile Amount of income at which 28% equates to the charge Individual Annual Exempt Amount Amount of offshore income required to make paying the charge worthwhile
£107,142.85 £10,600 £117,742.85 £178,571.42 £10,600 £189,171.42

How can an offshore bond help?

Financial Advisers dealing with ‘non doms’ or ‘UK resident but not ordinarily resident’ individuals should give serious consideration to the benefits of offshore bonds.


It may be possible for an individual to hold a large proportion of their offshore wealth in an offshore bond and then opt to be taxed on an arising basis, thus avoiding the relevant RBC. On top of this, it is possible for the individual to take up to 5% of the total premiums paid into the policy each year without an immediate income tax liability. However, care should be taken to ensure that any funds invested in the offshore bond do not include any previously unremitted offshore income and/or gains, as in this case, any withdrawals would be taxable when remitted back into the UK. For some ‘Non Dom’ individuals, two bonds might be appropriate: one for ‘mixed’ funds and the other for untainted capital. The latter could be used for providing the 5% tax deferred withdrawals in the UK, which the former could not.


Furthermore, if the ‘Non Dom’s’ eventual intent was to leave the UK, they could delay the encashment of the bond until they were non UK resident, as this would mean that any gains realised would not be liable to UK tax although of course they may be subject to tax in the new country of residence.


Offshore bonds also offer benefits to non UK domiciles because bond gains are not relevant foreign income for the remittance basis of taxation. Therefore a non UK domiciled but UK resident individual only has to pay income tax whenever a chargeable event occurs on their bond and a gain is triggered. This means that like any other UK resident investor, a non domicile can hold collective investments and deposits within an offshore bond wrapper and benefit from gross roll up until they incur a chargeable event gain. Provided that any other unremitted income and or capital gains total less than £2000 in a tax year, there is no requirement to pay the RBC.


Important Notes

Finally, please note that every care has been taken to ensure that the information provided is correct and in accordance with our understanding of law and Her Majesty’s Revenue and Customs’ (HMRC) practice as at 6 April 2013. You should note however, that we cannot take upon the role of an individual taxation adviser and independent confirmation should be obtained before acting or refraining from acting upon the information given. The law and HMRC practice are subject to change.