Our client, a non-UK domiciled individual, has lived in the UK for a number of years. Initially, his “non-dom” status allowed him to access the remittance basis of taxation and he did not suffer UK tax on investment returns that he retained overseas.
This was a pleasing result, but the landscape changed from April 2008 with the introduction of the £30k remittance basis charge (“RBC”) – see our Non-UK Domicile page for more detail. As our client’s overseas investment returns did not warrant him paying the RBC*, he instead fell into the “arising basis” of taxation. The result would be that all of his worldwide income and gains would be subject to UK tax each year.
Naturally, our client was concerned that his investment returns were being eroded by the subsequent tax bills, particularly as economic conditions were hampering investment growth more generally. Our client had picked up on the possibility of using a Protected Cell Company (“PCC”) to defer payment of Capital Gains Tax ("CGT") applies in certain cases when an asset is sold for more than it was originally purchased. The taxable gain (profit) may be triggered following the transfer of an asset, although commonly this would follow a sale. A number of tax reliefs are available to exempt or reduce the tax that may apply. Basic tax planning may... More (click here for more detail on PCCs). However, we suggested that he should consider a number of other options to mitigate the effect of the 2008 changes and we put forward two alternative structures.
The first was to put his overseas assets into an offshore insurance bond, sometimes know as a single premium life bond. These tax efficient investment wrappers allow investment returns to roll-up within the bond tax free until it is encashed or otherwise disposed of. Given the new highly restrictive caps on pension contributions and overall values, these offshore bonds are being used even more widely as a means offering the tax favoured environment of a pension, albeit without tax relief at the time contributions are made.
The growth in value of the bond is liable to income tax if the investor is UK resident when encashing or disposing of the bond, although there are a number of techniques which can be employed to exit from such a bond with no UK tax at all. For example, whilst our client may stay in the UK until his young family have finished their schooling, he confirmed that it has always been his intention to eventually return to his homeland. Under current rules, there would be no charge to tax in the UK if he surrendered his bond after he left.
Another alternative we considered, was to settle his overseas assets on an offshore trust, as this could provide for capital appreciation without ongoing capital gains tax charges or payment of the RBC. As any income (as opposed to capital gains) arising in the trust would continue to be taxable on our client personally, it would be important for us to work with his bankers and trustees to structure an investment portfolio geared towards capital appreciation as opposed to income yields.
We could also structure the trust so that all the family members were potential beneficiaries to provide flexibility to exploit different tax exposures amongst family members and allow for effective succession planning. The assets in the trust would also benefit from “excluded property” protection from UK inheritance tax, making the trust an ideal capital appreciation vehicle for his family. If excluded property is a key driver, there would be nothing to prevent the trustees from holding investments via a PCC or a bond, of course.
The final choices made by this particular individual are unimportant. The point that is worth making however, is that there are almost always options that can be considered in any given set of circumstances. Focusing on just one of these (the PCC in our client’s case) can be dangerous and is certainly not a sensible course of action. As our client said “this is why restaurants have menus”!
* One must have significant offshore income and/or capital gains to make this economic. Looking solely at income, gross non-UK income of at least £80k would be required to make payment of the £30k RBC cost-effective.