Tax planning opportunities for non-domiciled individuals
Spring 2006
In this article we’ve decided to take a look at the potential
benefits that can be achieved through efficient offshore tax
planning.
For years now UK residents have been able to
make substantial tax savings as a result of the subtle difference
between being merely a UK resident or being a UK resident and
domiciled individual.
What is the difference between residence and
domicile?
Residence is an easy concept to understand and
is measured in terms of physical presence during the tax
year. An individual is generally considered UK resident if
they are physically in the UK for 183 days or more in the tax
year.
Domicile can be more difficult to define than
residency, as it is really a concept of general law. Your “domicile
of origin” is acquired at birth, normally from your father. A
“domicile of choice” can be acquired from the age of 16 and broadly
involves leaving the current country of domicile to settle in
another country. It requires strong proof of having moved to the
other country permanently or indefinitely - living in another
country is not conclusive evidence of an intention to change
domicile. In practice, the changing of ones domicile is often
very difficult to achieve.
Tax Saving through Offshore Structures
For individuals who are non-UK domiciled but
resident in the UK there are significant tax savings which can be
made through the establishment of an offshore structure.
Income Tax (IT)
Any income arising in the UK is automatically
subject to IT. However, a UK resident, non-UK domiciled
individual with foreign income can maintain these monies offshore,
and as long as this income is not remitted to the UK can mitigate
the need to pay UK IT.
Inheritance Tax (IHT)
Currently IHT is 40% on any UK assets over
£285,000 (from 6 April 2006). However, a non-UK domiciled
individual settling these assets into a trust will be able to
completely mitigate this tax charge should they survive for seven
years after the assets have been settled. Once the assets are
in the trust structure, they can be permanently ring fenced from
IHT even if they became UK domiciled.
Capital Gains Tax (CGT)
For a non-UK domiciled individual, any assets
settled into trust will be subsequently protected from CGT on any
increase in capital.
To simplify, we have summarised this
information into the table below, which shows the individual
taxable status positions in relation to CGT, IHT and IT.
|
|
UK resident
UK domiciled
|
UK resident
Non domiciled
|
Non - UK resident
Non - UK domiciled
|
|
Income Tax (IT) for Individuals
|
|
|
|
| UK Income |
Taxable |
Taxable |
Taxable |
| Foreign Income |
Taxable |
Only if funds remitted to the UK |
Not Taxable in the UK |
| Capital Gains Tax (CGT) for
individuals |
|
|
|
| UK Gains |
Taxable |
Taxable |
Not Taxable in the UK |
| Foreign Gains |
Taxable |
Remittance of capital is tax free |
Not Taxable in the UK |
| Inheritance Tax (IHT) for
individuals |
|
|
|
| UK Assets |
Taxable |
Taxable |
Taxable |
| Foreign Assets |
Taxable |
Not Taxable |
Not Taxable in the UK |
| |
|
|
|
In conclusion, the main benefit for UK
resident, non-UK domiciled individuals is that in conjunction with
appropriate tax advice and suitable offshore tax planning, CGT and
IHT on UK assets can be completely mitigated.
Should you wish to discuss any aspect of
offshore planning in more depth, please call Justin Thomas on 01534
823251.