One of the less-publicised announcements this year’s Spring Budget was news that the current tax regime for temporary or ‘non-domiciled’ UK residents is changing. For ‘non-doms’ out there, it’s worth understanding what changes are being introduced – and when – and the implications from a tax perspective.
The current remittance basis regime
At present, the remittance basis of taxation means temporary residents only pay UK tax on the income and capital gains brought into the UK, not on any worldwide income or gains. However, the Chancellor announced that the remittance basis will come to an end from April 2025. Its replacement is the FIG (foreign income and gains) regime.
Under the new FIG rules, any foreign income and gains realised during the temporary resident’s first four tax years of residence in the UK will be tax-exempt. But after four years, they will be required to pay the same income and capital gains taxes as regular UK taxpayers.
From a tax planning perspective, this could make life in the UK much more expensive, particularly for high-net-worth individuals who accumulated wealth outside of the UK and were working on the provision that those assets would not be taxed. Of course, there are various tax planning opportunities in the UK, that can be considered to help. However, arriving individuals have not had the benefit of saving into accounts like ISAs and pensions during their lifetime, therefore more of their assets may be “exposed” to taxation. Additionally for an individual who plans on living in the UK for more than four years, but not indefinitely, they may not want to lock into UK specific investment accounts.
How can offshore bonds help?
One possible route to consider is to use an offshore bond. Offshore bonds are investment wrappers issued by life insurance companies based outside the UK. Such investment structures have been in place since the 1960’s and are regularly used by both UK and non-UK savers. For temporary UK residents, an offshore bond can offer several benefits, including:
- Tax-deferred growth: The growth within the bond is typically free from UK tax until you make a withdrawal.
- Flexibility: Investors can choose from a variety of investment funds within the bond, letting them tailor their portfolio to their own risk tolerance and investment goals.
- Tax Free Access: Managed carefully, the original capital can be withdrawn tax free, without realising taxable gains on the profits.
One of the most important aspects of an offshore bond is its flexibility and the option of taking up to 5% of the original capital out each year, tax free. By structuring the bond so that the annual 5% capital allowance covers likely expenditure needs, income and gains on investments can be deferred indefinitely. Provided the temporary resident does not require funds in excess of their 5% allowances, they will not need to pay UK tax on the profits accrued.
As an example, a temporary UK resident could place their investments into an offshore bond and have no tax payable on the investment returns inside the bond. They could take 5% per annum for up to 20 years before they have used all the original capital. Only after using all the capital, would future withdrawals be taxable. However, if no withdrawals in excess of the capital are made before leaving the UK, and instead they are only withdrawn after becoming tax resident elsewhere, no UK tax will be payable. Consideration of the new tax residence will be required, to understand what, if any, tax would be due in that jurisdiction.
An offshore bond is not necessarily the only solution for everyone but should be considered as part of a holistic and well thought through financial plan. Anyone considering this option should talk to a financial planning professional who can advise on how a bond will fit into their plan and help consider it alongside other potential solutions.
A financial planner can also consider how the bond can interplay with other strategies, such as gifting bond units to lower-rate taxpayers if withdrawals are in excess of the 5% annual capital allowance. An offshore bond may also be useful in order to shelter the profits within trusts, that will otherwise become taxable under the proposed FIG regime.
Although the changes to the remittance basis are likely to present some challenges for temporary UK residents, it is still possible to put in place strategies to help optimise your tax affairs. Talking to a financial planner about investments such as offshore bonds is a great way to identify tax planning opportunities and ensure that income is withdrawn as tax-efficiently as possible while living in the UK.
Providing support, strategy and accountability
At Partners Wealth Management, we create financial planning strategies that can help more people be as tax-efficient as possible. If you are a temporary UK resident, or a non-UK citizen planning to move to the UK, call Partners Wealth Management on 020 7444 4030 or email us for an initial conversation.
Partners Wealth Management does not provide tax, legal or accounting advice. It is important to take professional advice before making any decision relating to your personal finances. Information within this document is based on our current understanding and can be subject to change without notice and the accuracy and completeness of the information cannot be guaranteed. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK. We cannot assume legal liability for any errors or omissions it might contain. Levels and bases of, and reliefs from, taxation are those currently applying or proposed and are subject to change; their value depends on the individual circumstances of the investor. No part of this document may be reproduced in any manner without prior permission. Taxation is based on your individual circumstances and may be subject to change.