The UK tax regime for UK resident but non UK domiciled individuals as it currently stands remains attractive. The main benefits of the UK’s regime is deferral of capital gains tax and income tax charges on certain profits arising outside the UK as well as freedom from UK inheritance tax in certain circumstances. Some of these concessions are given in return for the payment of an annual remittance basis charge. This article is intended to give a basic illustration of some possible planning solutions for UK resident but non-domiciled individuals.
Optimum Solution for Non-UK domiciled individuals
The UK tax profile of non-UK domiciled individuals can be enhanced considerably by utilising offshore trust structures to hold assets. Essentially the UK tax regime taxes gains arising in such structures when beneficiaries receive benefits from the trust. Even more significant is that tax on UK capital gains can arise much later than is the case where the asset is held directly. Such structures can give significant UK inheritance tax benefits when compared to holding assets directly. Where a trust is created at a time when the settlor is non-UK domiciled and is not yet regarded as deemed domiciled, for UK inheritance tax purposes, trust assets can be kept outside the potential charge to UK inheritance tax which otherwise applies at rates of up to 40%. This inheritance tax benefit in tandem with the ability of structures to defer the charges to UK income tax and capital gains tax can result in significantly higher returns on investments than may otherwise be the case.
In the UK for less than Seventeen Years?
Where an individual is resident in the UK for less than seventeen years and is regarded as non-UK domiciled for UK tax purposes generally they should be considering implementing offshore trust structures. Once an individual has been resident in the UK for in excess of seventeen years they become deemed domiciled for UK inheritance tax purposes. As soon as this occurs the individual’s entire worldwide assets become potentially exposed to UK inheritance tax (at rates of up to 40%). It is possible to prevent this exposure from arising by transferring assets to trust structures prior to reaching the 17 year point. This can have significant benefits in terms of not only UK inheritance tax but UK capital gains tax generally.
In the UK for more than Seventeen Years?
Where an individual is already deemed domiciled for UK inheritance tax purposes then it is generally not cost effective to utilise trust structures. It can be worth considering the use of insurance bond structures in such cases as these can sometimes mimic trusts. Such structures can defer exposure to UK tax on capital gains, plus potentially income, until the structure is finally unravelled. Essentially these structures act to block capital gains, as well as potentially income, that arise within the structure from being taxable on the UK resident owner of the bond structure.
It is possible that using insurance bond structures can also mean that the remittance basis charge may not need to be paid in relation to any income or gains arising within the bond structure. It was announced in the last budget that the annual remittance basis charge is to increase to £50,000 per annum for those individuals who have been resident in the UK for in excess of 12 years. In these circumstances bond structures are worth considering for non-UK domiciled individuals particularly where they are not able to utilise trust structures.
No action should be taken on the basis of this note and it should not be construed as forming professional tax advice. If required we can arrange for tax advice to be provided on the matters outlined.