Experts point non-doms to offshore bonds ahead of Budget

As chancellor allegedly George Osborne prepares to crack down on non-doms in Wednesday’s budget, experts have recommended offshore bonds as an alternative to those facing an increasing amount to protect their foreign earnings from UK tax.

According to The Financial Times, chancellor George Osborne has committed to increasing the annual tax charge paid by individuals for non-domiciliary status to more than the current maximum of £90,000.

Rachael Griffin, financial planning expert at Old Mutual Wealth, said the proposed increase to the “remittance charge” could make it more expensive for non-doms to defer paying UK tax on their overseas income or gains, suggesting offshore bonds as an alternative for non-doms who only hold investments.

“Non-doms do have legitimate tax planning opportunities available to them, in much the same way as UK residents do,” she said. “For example, rather than paying the annual remittance charge, if the non-domiciled individual only holds investments, then an alternative solution to this higher charge could be to wrap the investment inside an offshore bond.

“The offshore bond essentially defers any income tax and capital gains tax liability until the bond is encashed, which is why there is no cash to declare on an annual basis.”

She added that, unlike using an offshore bond, paying the remittance charge will lead an individual to lose their Government sanctioned capital gains tax allowance and personal allowance.

“What I would say to the chancellor would be ‘If you are going to make changes then make them now then for god’s sake leave it be.”

Osborne’s move would come after former Labour leader Ed Miliband proposed completely scrapping the status in the party’s General Election campaign earlier this year.

The remittance charge is paid by long term UK-resident non-doms in order to ensure their foreign income tax is exempt from UK tax. Introduced in 2008, the charge has increased to as much as £90,000 for non-doms who have lived in Britain for 17 years or longer. The Government is yet to confirm how much more it will increase by if it is altered in tomorrow’s Budget.

Endlessly fiddling

Sophie Dworetzsky, a partner at legal firm Withers, said an offshore bond forms one of many alternatives for non-doms who do not wish to pay a remittance charge.

“An offshore bond is absolutely a good idea for some people, but they will need to have some idea of how they will access their money inside the bond,” she said. “For example, if you live in the UK and you draw money out you will be taxed at UK income tax, which might not be what you want.

“If you are happy to leave your money in for the long term, or for your children who don’t live here, then it would be a good option.”

She said the Government’s “endless fiddling” with non-doms’ charges sends a message that the UK tax base has no predictability, which has led many clients to consider moving to the US as an alternative, due to its “consistency”.

“What I would say to the chancellor would be ‘If you are going to make changes then make them now then for god’s sake leave it be,” she said.

She added that there is a lot of misunderstanding around the rules, with many people overlooking the money the status brings in, with non-doms contributing around £8.2bn to the UK economy in the past year.

“What would be great for the UK would be to allow the non-doms to bring more of their money in efficiently to invest in businesses, because clearly that would benefit everyone,” she said. “Expanding business investment relief, which allows non-doms to invest their money into UK businesses, is one of the best things that could be done.”

Osborne has also proposed a reduction of the requirement maximum length of non-dom status, which currently expires when an individual has lived in the UK for 17 of the last 20 years.

Simon Martin, technical consultant at AXA Wealth International, said: “Once a non-dom individual has been resident in the UK for at least seven of the previous nine years they are required to pay a charge to remain on the remittance basis of tax.

“If they don’t pay the charge then they will be taxed on the arising basis – where overseas income and or gains are taxed regardless of whether they are remitted into the UK.”

He added that a non-income producing asset, such as an offshore bond, could help those who may be impacted by any future changes to the non-dom rules.

“If the overseas monies placed into the offshore bond are not tainted – meaning they do not contain unremitted income and/or gains – the non-dom can receive tax deferred withdrawals from the offshore bond under the 5% annual entitlement rule,” he added.