Plan while you can - Non-UK domiciled clients

On July 8 2015 the George Osborne announced a number of changes to the UK domicile rules. From 6 April 2017 irrespective of when someone arrived in the UK , those who have been resident in the UK for 15 out of the last 20 years will be treated as deemed UK domicile for all tax purposes, including UK IHT. A direct consequence of this is that they will no longer be able to use the remittance basis of taxation earlier than they would under the current rules.

Both of these changes impact the current income tax and inheritance tax planning available to these individuals. The changes come into effect in April 2017, this offers a limited opportunity to review the current planning options with your clients who may be effected.

So what are the options?

Income tax planning

Offshore bonds are not affected by the remittance rules, unless they use unremitted income or gains to fund the bond. This means that your clients can choose when to trigger income tax events (encashments) and can receive (inclusive of your ongoing financial advice fees) a return of up to 5% of the capital invested each policy year without triggering an income tax event.

Setting up an offshore bond now would offer an element of future proofing as the remittance rules will not apply to these investments and yet they can still benefit from gross roll up (except for withholding taxes) on the funds whilst they remain invested.

Inheritance tax planning

Non-UK domiciled persons are only liable to inheritance tax (IHT) on UK situated assets, but once they are deemed UK domiciled, their worldwide assets become liable to IHT on their death.

Offshore bonds in combination with a discretionary trust that includes the settlor can provide IHT planning for non-UK domiciled individuals. The Summer Budget 2015 confirmed that the use of excluded property trusts will have the same IHT treatment as present, other than the use of them where residential property is an asset of the trust. Placing the offshore bond in one of these trusts before they become UK deemed domiciled (currently at least 17 out of 20 years UK resident) and changing to 15 out of 20 years from 6 April 2017 will mean that the value within the offshore bond will be excluded property for IHT, even if the domicile rules change following the election.

Excluded property means the bond will not be included in their estate for IHT. However, they will still be able to benefit from the trust and can also utilise the income tax planning mentioned above. This is because they are creating a trust before they become UK deemed domiciled and the trust fund is held outside the UK.

Planning options like these once again emphasise the importance of providing advice to ensure clients maximise the opportunities available to them.

The information provided in this article is not intended to offer advice.

It is based on Old Mutual International's interpretation of the relevant law and is correct at the date shown on the title page. While we believe this interpretation to be correct, we cannot guarantee it. Old Mutual International cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this article.

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