Many expect offshore bond sales to benefit from the chancellor George Osborne’s announcement that from April 2017, anyone resident in the UK for 15 of the past 20 years will pay full British taxes on all worldwide income and gains.
“After 15 years non-doms will no longer be able to use the remittance basis charge to keep their offshore gains out of the UK tax net, taxes will be charged on an arising basis,” said Neil Chadwick, technical marketing manager at RL360°.
“There could definitely be use for an offshore bond in that respect, as it would allow non-doms to get their gross rollup without being taxed on an arising basis for any income or capital gains that will accrue inside the bond.”
Offshore structures
Osborne also announced that rules would be introduced to prohibit people from avoiding inheritance tax liabilities on UK property by holding it in an offshore structure.
"If non-doms do some planning they will hold themselves in good stead for the future."
“Now that these corporate structures will be looked through, it is no longer going to be viable for some people to pay the annual tax on enveloped dwellings to keep their property outside of the IHT net, as there will not be any tax benefits of doing so,” said Chadwick.
“There are going to be planning opportunities for people to use whole of life policies to offset the anticipated IHT charge, something that offshore bonds could also help with.”
Non-doms are able to claim the remittance basis of taxation, which does not tax foreign income and gains as long as they are not brought to the UK.
To access the remittance basis, longer term UK resident non-doms need to pay an annual remittance basis charge of up to £90,000.
Previously, when a non-dom had resided in the UK for 17 or more of the last 20 years their foreign assets became liable for UK IHT but remained exempt from all other UK taxation.
Paul Thompson, tax & estate planning consultant at Canada Life, said non-doms will have to start planning ahead of the new 15 year threshold so they can open themselves up to options such as creating an excluded property trust, which would ideally contain an offshore bond.
“If a non-dom creates an excluded property trust ahead of the 15 years, then the assets within that trust offshore will continue to be free of IHT even after they cross the threshold,” he said.
“Ideally, this trust would contain an offshore bond as it has minimal administration, you can take 5% withdrawals without any immediate income tax liability and the benefits can be accessed by the non-dom even after the 15 year threshold has been passed.”
Hold in good stead
Rachael Griffin, head of product law and financial planning at Old Mutual International, said the changes are likely to open non-doms up to planning opportunities which could in turn lead to an increase in offshore bond sales.
“For non-doms who were already in the UK this is a stark reminder that they may want to start planning for their IHT liability for the future if they wish to stay here,” she said. “If they do some planning they will hold themselves in good stead for the future.”
She added that there are still some technical details to be issued on how the 15 year rule will be calculated but that she expects the Government to follow existing rules set out in the statutory residents test to ensure consistency.
Similarly, Brendan Harper, technical services manager at Friends Provident International, said the new restrictions could benefit offshore bond sales.
“The Summer Budget contained few surprises,” he said. “There were no changes that adversely impact on FPI’s UK domestic affluent and expatriate customer propositions.
“In fact, there were several changes, including the 15 year time limit for enjoying non-UK domiciled status, which could result in increased demand for wealth preservation and transfer propositions.”
