Description:
Changes to rules for non-UK domiciled clients represent a window of opportunity for financial advisers before April 2017. This opportunity comes from current legislation which allows non-domiciled clients to gift their asset of a life assurance or capital redemption (investment bond) that is situated outside of the UK into an excluded property trust. The gifted asset will then continue to be excluded property for UK inheritance tax (IHT) purposes, even if the client is deemed domiciled after the new rules come into force.
Summary of changes:
At the 2015 Summer Budget, the UK Government announced a series of changes to tax rules for people who are not domiciled in the UK, referred to as non-domiciled. These changes will come into force in April 2017.
In summary, the Government is looking to introduce a ‘deemed-domicile’ rule similar to that in place for IHT, so that long-term residents of the UK can no longer claim to be non-UK domiciled for capital gains tax (CGT) or income tax purposes and opt to be taxed under the remittance basis. The new rules also stop someone who was born in the UK, and therefore UK domiciled at birth, claiming they are not UK domiciled while they are living (resident) in the UK.
These two categories that the Government has referred to are:
- ‘long-term resident’
- ‘born in the UK’
Changes for long – term residents:
For long-term residents, the proposed rules are that any individual who has lived in the UK for 15 of the past 20 tax years (including years as a minor) will be ‘deemed UK domiciled’. Once deemed UK domiciled, an individual will no longer be able to use the remittance basis for tax. In effect, their worldwide income and gains will be liable to income tax and CGT and their worldwide assets will also be subject to UK IHT.
These changes will take effect from April 2017 and will make the current £90,000 charge for those who have been UK resident 17 out of 20 years obsolete.
The proposals confirm that any gifts made by someone who is not domiciled in the UK (assuming the gift is excluded property, i.e. a non UK asset) will not be included within their estate should they later become deemed-domiciled under the new rules and die within seven years.
Changes for those born in the UK:
Any individual born in the UK with a UK domicile should not be able to benefit from the non-domiciled status while resident in the UK, including using the remittance basis of tax. Any individual who meets all of the following conditions will be treated as UK resident and domiciled;
- Born in the UK
- UK domicile at birth
- Resident in UK that tax year
- Was resident in the UK for at least once of the two tax years immediately preceding that tax year
Inheritance Tax:
A life assurance or capital redemption bond (investment bonds) situated outside the UK can be gifted into an excluded property trust (such as a Cyprus International Trust, for more details visit pahalaw.com) whilst an individual is non-domiciled. The investment bond will continue to be considered ‘excluded property’ for IHT purposes even if that individual is considered domiciled at a later date, for example if they have been resident in the UK for 15 out of 20 years post April 2017.
For any individual now approaching 15 years residence in the UK, it’s important to consider such an arrangement before it is too late. Once domiciled under the new rules, the individual will be unable to obtain the ‘excluded property’ treatment previously outlined.
The new rules are stricter for those born in the UK with a UK domicile. These individuals will not be able to benefit from creating excluded property trusts even if they are created after acquiring an overseas domicile.
Income tax:
Investment bonds are considered ‘non income producing’ and therefore anyone approaching 15 years residence in the UK may benefit from moving an income producing asset, for example equities or fixed interest securities, to an investment bond.
Once domiciled in the UK under the new rules, the policyholder can withdraw 5% per annum from the investment bond without an immediate liability to income tax. In addition, the bond could also be assigned prior to encashment to obtain preferential income tax rates, for example by assigning it to a spouse of adult child with lower earnings.
Capital gains:
Investment bonds are taxed under the chargeable event legislation and therefore gains made on them are liable to income tax at the marginal rate rather than CGT. There is generally no liability to CGT under the investment bond, leaving the annual exemption free to use for other investments.
Asset protection under Cyprus SPVs:
Cyprus International Trust (CIT) regime and/or the Alternative Investment Funds platform (AIFs) can be utilized by the non-domiciled UK residents to protect their assets from the upcoming ‘non-dom’ tax changes taking effect as of April 2017. Both the CIT and the AIF can function as specific purpose vehicles (SPVs) for converting general assets, securities, equities or fixed interest securities into investments bonds and/or life assurances so as to take full advantage of the ‘excluded –property’ treatment. In addition both schemes offer confidentiality vis a vis any reporting obligations for insurance wrappers as well as asset protection from potential creditors’ liability in case of a company default since the underlined assets will be segregated 100%, hence will be beyond the reach of the Company’s creditors.
For more information regarding the upcoming ‘non-dom’ resident status taxation rules’ changes in the UK and legal consultation on how to protect your assets via Cyprus corporate structures please contact Mr. Paris Hadjipanayis at [email protected] or visit pahalaw.com
