Investors who are UK resident but not domiciled in the UK can benefit from the tax treatment of an offshore investment bond by virtue of it being a non income producing asset.
UK resident but non domiciled investors are permitted to use the “remittance basis” to only pay UK tax on overseas income and gains that are remitted to the UK. The Finance Acts of 2008 and 2012 meant non domiciled UK residents had to pay a charge if they wished to continue using the remittance basis of either £50,000 or £30,000 per annum, depending on how long they had been resident in the UK.
Another option exists which is that non domiciled UK residents can elect to be taxed on the “arising basis” on international income and gains, regardless of whether they are remitted to the UK or not.
It is possible to use offshore investment bonds to mitigate the “remittance basis charge” on both investment income and capital gains. This is because offshore investment bonds are non-income and gain producing assets, where no tax is deducted annually on income or gains generated on the assets held within the offshore investment bond, other than a small amount of irrecoverable withholding tax. The only time the offshore investment bond becomes liable to income tax is when a “chargeable event” is triggered. So the bondholder could elect to be taxed on the “arising basis” and avoid paying the “remittance charge”, since no income or gains will arise on assets held within the offshore investment bond, until the triggering of a “chargeable event” which the bondholder can time and control to maximise tax efficiency. This ability to time a “chargeable event” allows the offshore bondholder to wait until they leave the UK before surrendering the offshore bond. As long as non UK residence has been established for 5 years there will be no liability to UK taxation. Please note that the taxation legislation of the country where the bondholder migrates to would need to be checked carefully.
Even when a “chargeable event” is triggered, the use of top slicing and time apportionment relief help mitigate the tax due. Please note there are slight differences in the way onshore and offshore top slicing is calculated – the offshore calculation can use complete policy years from the start of the bond, whereas the onshore calculation only goes back to the last chargeable event in the life of the bond to find the number of years held.
The ability to take 5% of the original capital invested in an offshore investment bond also presents an opportunity to generate income of the non-domiciled UK resident. As discussed elsewhere on this website, the 5% withdrawals are deemed to be a return of the original capital and hence not taxed immediately as income when paid to the UK resident.
A non domiciled UK resident who has been UK resident for 6 years is considering paying the remittance basis charge. They are additional rate taxpayers paying income tax at 45% and receive income from the following assets:
- Interest from savings of £20,000 per annum.
- Dividends from shares of £40,000 per annum.
- Income from fixed interest funds of £30,000 per annum.
We can calculate the tax due as:
- Interest from savings taxed at 45%; 45% of £10,000 = £9,000.
- Dividends from shares taxed at 42.5%; 42.5% of £20,000 per annum = £17,000.
- Income from fixed interest funds taxed at 45%; 45% of £15,000 = £13,500 per annum.
This gives a total income tax liability of £39,500.
This would make paying the remittance charge basis of £30,000 a preferable option. However, investing the assets into an offshore investment bond and electing to be taxed on an arising basis would not only shelter the ongoing income, but would also mitigate capital gains tax from the shares and fixed interest fund.
The offshore investment bond could then be surrendered once non UK resident but specialist advice would be required. If income is required whilst still resident in the UK, it would be possible to take up to 5% per annum cumulatively with no immediate liability to income tax.
Should the non domiciled UK resident find that they are to be deemed domiciled an option to consider is to hold the offshore investment bond within a trust called the “Excluded Property Trust”. Specialist advice would be required for this sort of arrangement.