Int’l life policies’ status boosted by non-dom changes: Lombard Int’l

Investing via international life insurance policies has become an “increasingly attractive solution”, following today’s implementation of the UK government’s changes to the tax status of resident non-domicile individuals (RNDs).

Today’s new raft of rules affect tax status of RNDs, who have been resident for 15 of the last 20 years and are treated as domiciled within the UK. Moreover, the rules for returning domiciliaries change, with them being taxed as UK-resident domiciliaries while in the UK.

Simon Gorbutt, associate director of Wealth Structuring Solutions, Lombard International Assurance, said that the changes announced by the UK government “won’t come as a surprise to many RNDs and their advisers”, as RND taxation has been a subject of constant change over the years, particularly since 2008.

However, one concern is that the treatment of RNDs, and their taxation, is becoming an “ever more complex issue”, and, he warns, that more change is likely.

“The changes do not come without any cushion from the government,” he said. “It would have been a significant and unexpected shock for those seeing an end to their permanent non-domiciled status to also face capital gains taxes on their assets relating to their entire residency in the UK. A transitional arrangement allows the rebasing of assets of an individual deemed UK domiciled from April 2017.

“Effectively, this means that provided assets meet certain criteria, such as having been owned since last year’s Budget in March, they will automatically be rebased to their market value at 5 April, and capital gains from this point on will be subject to tax,” Gorbutt added

‘Increasingly attractive’

With no remittance basis election required on a life assurance contract, this vehicle will become “an increasingly attractive solution”, Gorbutt said. Furthermore, the status of life assurance policies will not change as part of these new rules, allowing clients to continue to benefit from tax deferral. In fact, a consultation in 2016 reaffirmed that the 5% tax-deferred withdrawal allowance remains “a key component of life policy taxation,” he said.

“Following the recent changes, trusts will remain a key strut of cross-border wealth structuring for non-doms in the UK, often in conjunction with life assurance,” he said. “There are some confirmed restrictions, such as the loss of trust protections if additions are made to the trust by a deemed domiciled settlor. However, trusts formed prior to an individual being deemed UK domiciled, retain some protection from tax on foreign income and gains, if benefits aren’t distributed.”

The changes:

  • In the Summer Budget 2015, the UK government announced changes to tax rules for individuals who are not domiciled in the UK. Non-doms are defined as individuals who have their permanent home outside the UK.
  • Under the current UK tax regime, while non-doms have to pay UK tax on UK income and gains, if they claim the ‘remittance basis’ of taxation, they will only pay UK tax on their foreign income and gains if they are brought to (remitted) to the UK. The remittance basis of taxation is not available to UK domiciled individuals.
  • In order to claim the remittance basis in relation to their foreign income and capital gains, non-doms must either have less than £2,000 of such income or gains of £2,000 in a year or complete a self-assessment tax return that includes a claim to the remittance basis.
  • In order to claim the remittance basis, non-doms must pay a remittance basis charge of a minimum of £30,000 per year if they have resided in the UK for a certain amount of time.
  • The non-dom tax changes announced by the UK government affect non-doms who have been resident in the UK for at least 15 of the past 20 years. After 5 April 2017, they will be deemed UK domiciled for all tax purposes. As a result, they will no longer be able to use the remittance basis of tax and their foreign and UK assets will be subject to inheritance tax (IHT).
  • Under the changes, UK taxpayers leaving the country will only lose their resident tax status after having lived outside the UK for up to six years, going up from the current IHT rule of three years.
ABOUT THE AUTHOR
Gary Robinson
Deputy Editor, International Investment and Head of Video at Open Door Media Publishing. A fully qualified journalist and filmmaker with more than 20 years' financial services experience, both as journalist and originally as an IFA.

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