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Domicile is coming home to boost

Ten years ago, if someone said they were going offshore you may have

asked them to send a postcard. It is a sign of the increasing globalisation

of financial services that your first reaction now may be to ask about the

tax advantages.

At first glance, you could be forgiven for failing to see the advantages

of investing offshore as people domiciled and resident in the UK are liable

to tax on their worldwide income and gains. However, closer inspection will

begin to reveal tax planning opportunities.

Your client may have been living and working in the UK for years and be

clearly UK-resident. But have you considered their domicile status?

For non-UK-domiciled individuals, overseas income and gains will only be

subject to UK tax if the amounts are remitted to the UK. These people

could, for example, have an offshore bank account earning gross interest or

make offshore capital gains. If the interest or proceeds are not remitted

back, then no UK tax liability will arise.

Domicile essentially equates to the country you consider home and where

you wish to retire and see out the rest of your days. Everyone acquires a

domicile of originat birth, normally that ofthe father.

This is very resilient and, unless your actions dictate otherwise, it may

be retained despite many years of UK residency. Be aware of the concept of

deemed domicile which applies for inheritance tax purposes after 17 years

of UK residency.

A word of warning. The remittance basis does not apply to amounts

chargeable under Schedule D Case VI, which is where gains on offshore bonds

are taxed.

For those domiciled in the UK, the key word in the earlier statement is

income. If the product has no income arising, you can defer personal tax

liability.

The offshore provider will normally be based in a tax-favoured

jurisdiction offering effectively gross returns – gross roll-up. Until

gains are taken, a tax-free environment may exist within the product itself

and personally by the investor.

Two investments which achieve the benefits of tax deferral are offshore

bonds and offshore funds.

With an offshore bond, the investor can defer personal tax liabilities

until the bond is partially or completely encashed. Withdrawals of up to 5

per cent of the initial investment can be taken annually for 20 years with

no immediate tax charge.

The flexibility is enhanced by the 5 per cent allowances being cumulative.

Unused allowances can be carried forward and used in a later year.

Withdrawals within 5 per cent limits do not affect entitlement to age

allowance.

A refinement to the standard offshore bond which offers access only to the

life company&#39s internal funds isa portfolio bond which willpermit the

choice of external collective investments, such as units in unit trusts,

shares in investment trusts, Oeics, etc.

The investor creates his own diversified portfolio, tailored to his

specific circumstances but all within the env- elope of the bond. Paperwork

is minimised for the investor and funds can be switched within the bond to

meet changing circumstances with no tax charges arising.

Then there are offshore funds. The Inland Revenue differentiates between

non-distributing and distributing funds. If the latter status is sought,

then Inland Revenue certification must be obtained.

Broadly, a distributing fund must distribute a minimum of 85 per cent of

its profits on an annual basis. Gains on the ultimate disposal of the

shares/units will be subject to capital gains tax.

Up to 15 per cent of the annual profits may be rolled up and converted

into capital. Where the fund achievescapital growth at the expense of

income, then, in reality,a greater degree of tax deferral and conversion to

capitalis obtained.

Capital gains on disposal will be mitigated by non-business asset taper

relief and investors can make piece-meal disposals, restricting gains

within annual exemption limits to receive a tax-free “income” in later

years.

Disposals of holdings in non-distributing funds are liable to income tax

under Schedule D Case VI. Thereis no ability to convert income to capital

but there is anincreased capacity for taxdeferral through the policyof

non-distribution.

The increasing trend of international mobility has brought an increasing

acceptance of offshore investments as an effective and legitimate means of

tax planning.

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