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Thirty dancing

Much attention has been given to the proposed new provisions for the additional charge payable by long-term UK residents who are either not UK-domiciled or not UK ordinarily resident and who wish to use the favourable remittance basis for income and gains arising overseas.

Broadly speaking, the remittance basis means that such a person only pays tax in the UK to the extent that any such income or gains are brought into the UK. It is a little more detailed than that but that is broadly what it means.

Until the end of 2007/08, there was no charge for the remittance basis. There were also a number of ways that those using the remittance basis could bring funds back to the UK without them being treated as remittances for the purposes of the legislation. Many of these strategies, including the ceased source and cashonly methods, ceased to be effective from April 6.

However, the rules are changing for non-dom or non-UK ordinarily resident individuals wishing to access the remittance basis from April 6. If they have been resident in the UK for seven tax years out of any period of 10 tax years, including the tax year in question, then unless their foreign income and realised gains potentially subject to tax do not exceed £2,000 in a year (the de minimis rule) or they are not an adult, they will need to pay a yearly fee of £30,000 for the remittance basis to apply.

Just because they have paid the £30,000 fee does not exempt the unremitted income and gains for that year from future tax when an actual remittance takes place. This means that previously unremitted amounts from an earlier year – even from years before the charge was introduced – will remain subject to UK tax if remitted into the UK while they are UK resident. Therefore, they do not necessarily escape a UK tax charge on income and gains for a year that they pay the £30,000 fee. All they do is buy the right to deferment.

To make payment of the charge worthwhile on a year-by-year basis, they will need chargeable income, that would otherwise be taxed on the arising basis, in excess of £75,000 (40 per cent of which is £30,000).

If chargeable gains are included, then the figure of £75,000 will be bigger as chargeable gains suffer 18 per cent tax from April 6. Of course, they need to keep in mind that there is the latent UK charge on any subsequent remittance while UK resident.

It is self-evident that if there are no gains or income arising in a year, there is no need to pay the £30,000 fee. Under the draft legislation as it stands, it would seem to be a relatively straightforward matter to wrap investments into an offshore insurance bond to put a ringfence round the potentially offending investments.

The investment would usually be made in cash and any realisation of gains to create liquidity or any effective disposal of assets would give rise to the potential for creating a capital gain. However, it would not be difficult to avoid remitting this to the UK as one would make the investment with a non-UK insurance company.

If the disposal to facilitate investment took place after April 5, the remittance basis for any gain will only be available to a long-term resident UK non-dom investor if the £30,000 fee is paid. No doubt some furious disposal or rebasing activity by well advised non-doms before this date will have taken place.

The defensive offshore bond wrapper then looks to be a quite simple and appealing method of shielding a UK-resident non-dom from UK tax on an arising basis but, crucially, without having to pay the £30,000 fee for that privilege.

So are realised bond gains taxed on the remittance basis (not assessable unless brought into the UK) and, if so, do you have to pay £30,000 to access that basis in the year that the gain is made? The answer to the first part of the question is no. The remittance basis does not currently apply to insurance bond gains and will continue not to apply. Thus, all gains made will be assessed on a UK-resident non-dom on the arising basis, even if amounts are not brought back into the UK.

Two aspects of this fact need to be considered, however. With a suitably flexible wrapper and access to a wide enough range of funds, the need to realise gains while UK resident may be unnecessary.

Choosing the right bond can therefore be very important. There is also the 5 per cent withdrawal rule to consider. It applies to offshore bonds when owned by non-doms. This means that amounts within the 5 per cent rule can be withdrawn from the bond without giving rise to an immediate tax charge at that time. But what if the sum withdrawn is brought into the UK? Well, as there would be no accrued remittable gains or income, the 5 per cent could even be brought into the UK without tax charge.

However, care needs to be exercised here as if the bond was originally purchased with funds which included previously untaxed foreign income and capital gains, a constructive remittance may arise.

Is this benign tax regime for offshore bonds owned by non-doms likely to continue? There is no current indication that it is about to be stopped.

However, given the attention that is constantly paid to anti-avoidance – and especially given the recently taken action to close down some of the means of effectively remitting without paying tax under the remittance basis – no guarantees can be given regarding the future but right now the offshore bond looks to be a potentially appealing solution for UK-resident non-doms.

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