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UK Resident but Non-Domiciled: Is the party over?

Planning opportunities to help Res Non-Doms survive the changes to the regulations.

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The principles In the Summer Budget of 2015, the Government announced a series of proposed reforms to the tax rules for people who are resident but not domiciled in the UK (Non-Doms).

The proposed reforms will restrict some individuals from claiming non-dom status for tax purposes. A ‘deemed domicile rule’ will be introduced so that long term residents of the UK can no longer claim to be not domiciled for tax purposes. The purpose of the changes is to ensure that long term UK residents pay their fair share of tax while retaining an internationally competitive tax system to attract overseas talent and investment.

These reforms are under consultation and are expected to be agreed and implemented to begin operation in April 2017.

Resident non-doms and their advisers are looking for ways to plan their investments to mitigate the effect of these changes, which may mean significant additional tax liabilities, unless appropriate action is taken.

The current positionAs it currently stands, individuals who are resident but not domiciled in the UK:

• Are liable to UK tax on income and capital gains which arise in the UK, but they can choose to pay UK tax on their foreign income and capital gains only if and when they are remitted to the UK.

• The remittance basis rules have changed since 2008 when an annual £30,000 remittance charge was levied against those that have been resident for at least 7 of the previous 9 years.

• In April 2012, the charge increased to £50,000 for individuals who had been resident in the UK for at least 12 of the previous 14 years. This was increased again to £60,000 in April 2015.

• The annual remittance charge now stands at £90,000 for individuals that have been resident for at least 17 of the past 20 years.

The changesThe Government announced that from April 2017, it intends to treat any individual who has been resident in the UK for at least 15 out of the last 20 tax years as deemed UK domiciled for tax purposes. Once deemed domicile in this way, an individual will no longer be able to use the remittance basis and their worldwide income and gains will be subject to UK income tax and CGT. All of their non UK situs assets will be subject to Inheritance Tax (IHT) – just like their UK based assets.

This will mean that those who have chosen to make the UK their long-term residence will pay all taxes on the same basis as UK residents.

Although these proposals are at the consultation stage and the details are not yet clear, the Government intends these new rules to take effect from April 2017.

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HBFS focuses on a range of solutions that have 2 main building blocks, with a number of ‘add on’ features that can fine-tune these solutions for individual needs.

Once we have set out how they work, we will see how they can be applied in 3 case studies.

The building blocks for solutions for non-doms.

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Building Block No. 1 – The Offshore Wrapper• Offshore Wrappers, also called Offshore Bonds

(OSBs), operate under the Chargeable Events Regime laid down by HMRC. This means they are not a controversial planning tool.

• They are deemed ‘non income producing assets’. This automatically and legitimately means there is no assessment to Income Tax and to CGT on an arising basis. This in turn means that if the assets remain inside the OSB there is no tax to be paid on income or on capital appreciation.

• If clean capital is invested, HMRC allows up to 5% of the capital invested to be taken into the UK annually for 20 years with no immediate tax liability. If more than 5% is remitted (called a chargeable event) there will tax to pay, but this should be only on gains.

• These Wrappers are segmented – split into multiple mini Bonds. Assigning segments to lower rate tax payers like a non-working spouse or a child (over 18) can significantly mitigate tax liabilities.

• The underlying assets can be held in Authorised Unit Trusts, OEICs, most non UK collectives, Investment Trusts and others – but not in individual stocks and shares, private equity or real property.

• OSBs can easily be held in Trust – and some Trusts will provide significant IHT mitigation while still allowing access to the assets.

Building Block No. 2 – The Trust Solutions:All of the Trust Solutions mentioned below operate under regimes laid down by HMRC. This means they are not a controversial planning tool.

Excluded Property Trust (EPT)• An EPT contains ‘property comprised in a

settlement and situated outside the UK where the settlor was, for the purposes of IHT, domiciled outside the UK at the time the settlement was made’.

• As long as non UK assets go into the EPT when the settlor is non UK domiciled, the assets in the EPT will never be considered part of the settlors Estate for UK IHT purposes – even if the settlor becomes domiciled or deemed domiciled.

• The settlor is included as a discretionary beneficiary – meaning that money can be brought into the UK for the settlor to use. (Income tax may be liable).

• An EPT is not a Gift with Reservation nor is it a Chargeable Lifetime Transfer – so there is no entry charge regardless of the amount put in Trust.

Discounted Gift Trust (DGT) • A DGT can provide a tax deferred income of up 5%pa which can be deferred for up to 60 months.

• It also provides an initial IHT saving. Subject to underwriting. A proportion of the investment is immediately outside of the settlor(s) estate with the remaining amount being tapered out over 7 years.

• Growth is immediately outside of the estate.

• The settlor(s) can also be included as Trustees.

• A DGT is not a Gift with Reservation and can be written on an Absolute or Discretionary basis.

• Other Trust solutions can be wrapped around an OSB such as a Loan Trust, Gift Trust or Lifestyle Trust. The use of such Trusts would depend on the circumstances, planning needs and wishes of your clients.

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Case Studies: applying the toolkit.

Case Study 1: Dealing with Andrei’s income tax and CGT challenge• Andrei has been resident in the UK for just over 13

years. He was happy to pay the Remittance Basis Charge of £60,000 to allow him not to settle UK taxes on the income from his £10m investment portfolio in Switzerland and would have paid the £90,000 in a few years. But he now only has a year and a half to sort things out – otherwise he faces UK income tax at the additional rate and CGT on gains too. The higher rate RCB will no longer be available.

• If we assume income tax at 45% and Andrei’s portfolio produces 5% income, he may have an annual tax bill in the UK of some £225,000 after April 2017. He will have to sell assets to settle this, creating CGT liabilities too.

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• We can liquidate the existing portfolio and settle any outstanding tax liabilities before April 2017 then invest the clean capital into an OSB. We build a portfolio of funds suited to his risk profile.

• Andrei will never pay CGT on any gains in the OSB – even when he takes money out – and no income tax at all unless he needs to bring money to the UK.

• If he does want income in the UK, he will be allowed to take up to 5% of the capital invested with any income tax deferred, possibly for 20 years or longer. That may be as much as £500,000. And if he doesn’t take it for a year, the allowance rolls up. In 3 years’ time, he will be able to bring £1.5m into the UK with no immediate tax to pay.

• That beats an income tax bill of £225,000 per annum to HMRC.

• Andrei can also use an EPT to save the IHT liability his Estate will suffer on his passing .

Case Study 2: Dealing with Bernard’s IHT difficulty• Bernard is nearly 75 married with grown up

children and has lived and worked in the UK for the past 14 years. He is in good health and plans to stop working on his 75th Birthday. He has £7 Million invested in the Isle of Man with a Swiss Investment Bank and also owns two properties both of which are in the UK. Bernard is concerned about providing himself and his wife with an income once he retires and mitigating any UK IHT liability in the event of his death.

• Unfortunately Bernard won’t be able to use an EPT. Although Bernard is still non domiciled as he has lived in the UK for less than 15 years, HMRC could argue that he has chosen the UK as his domicile of choice because he only owns property in the UK.

• However Bernard could use a Discounted Gift Trust (DGT) wrapped around a Redemption version of an Offshore Bond. This would allow Bernard and his wife to gift capital but still permit them to receive an income of up to 5% per annum with tax deferred. In addition to this a certain

percentage of their gift would be immediately out of their estate with the remaining amount tapering out over 7 years.

• We can use a Redemption version of the Offshore Wrapper to ensure the asset becomes generational – the OSB outlives Bernard and wife so his children and any potential grandchildren can also then enjoy the opportunity to draw income into the UK if they decide to live here with the same tax deferred benefits.

Case Study 3: Dealing with Clement’s unexpected income tax and CGT liability• Clement was born in South Africa and came to

live in the UK as a 20 year-old some 40 years ago. He has built and sold successful businesses internationally and kept most of the assets in offshore portfolios although recently he moved about 50% to a UK private bank. He is now worried about IHT – he has more than enough UK income from his Directorships and investment income here. Do the changes impact on his position and can IHT be saved?

• Clement unfortunately can’t use an EPT. He is already deemed domiciled for IHT purposes which will be charged on his worldwide assets. But there are other solutions for him.

• As he has more than enough income, he can make Gifts out of surplus income into Trust. This can be managed for him in an OSB and all the capital and growth will be immediately outside of his Estate. If he feels able to give up the income received from any of his capital, he can place this into a Loan Trust – the growth will be immediately out of his Estate and the capital is available to him if he wants it.

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Advisers: Freddy David PFA (Managing Director), Saul Zneimer DipPFS, Moshi Kahtan DipPFS, Grant Benjamin DipPFS, Benji Silverstone DipPFS, David Margo | Consultants: Jonathan Rosen, Kishan Devani | Head of Investments, Pensions and Trusts: Sam Deboo

HBFS is the trading name of HBFS Financial Services Ltd., which is authorised and regulated by the Financial Conduct Authority. FCA number; 463752. Registered address: 52 High Street, Pinner, Middlesex HA5 5PW. Registered in England, Reg. no. 5273179. Trading address: 3 Theobald Court, Theobald Street, Borehamwood, Hertfordshire WD6 4RN. © 2015 HBFS Financial Services Limited. All rights reserved.

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HBFS Financial Services Ltd (Manchester)Halifax House93-101 Bridge StreetManchester M3 2GX

T. 0161 669 4678 E. mail@hbfs.co.uk

HBFS Financial Services Ltd (London)3 Theobald CourtTheobald StreetBorehamwoodHertfordshire WD6 4RN

T. +44 (0)20 8953 3444E. mail@hbfs.co.ukW. www.hbfs.co.uk

Past performance is not necessarily a guide to future performance. Your clients may lose part or all of their money. A full risk assessment is carried out on clients.

A Res Non-Dom strategy that puts all the pieces in place.HBFS specialise in bringing together financial planning with wealth management.

We are regulated advisers who build strategies to help our clients structure their affairs to mitigate tax and manage the underlying assets for them according to their financial goals and risk profile.

We have a range of planning tools at our disposal to turn the challenges of the changes in the resident Non-Dom legislation into opportunities for our clients.

For more information about how HBFS maybe be of value to you, please contact Freddy David or Saul Zneimer on 020 8953 3444 or email us at mail@hbfs.co.uk