Successful financial advisers focus their time and attention on attracting and serving clients who are likely to have challenges to overcome and objectives to meet, for which advice will be required, and who are prepared to pay for it – one way or another.
How people pay for advice and the tax connotations when payment is facilitated via a financial product is a subject I will spend some time on in this column in a little while.
For now, though, I would like to have a look at a category of client for whom advice is likely to be important and one who is likely to have the inclination and wherewithal to pay for it – high-net worth UK resident non-domiciled individuals.
OK, this particular segment may not represent a significant part of any particular adviser’s client base. But when they present themselves there is likely to be mutual benefit in the adviser/client relationship.
It does not take much to realise that the “three Cs” are likely to be present in relation to advising UK resident non-doms.
- That the issue to be advised on is relatively complex
- lhat the client cannot easily “self serve” to an answer
- That the consequences of “getting it wrong” are serious.
This is, I think, a simple “three question test” to apply to most aspects of financial advice, to test whether it’s something that a client would be prepared to pay for.
Ultimately, of course, whether a client is prepared to pay or not will have a high degree of subjectivity attached to it – especially in relation to their perception of risk, reward and attributed value in relation to the issue that may be advised on. But as a general principle, the three Cs test is a good starting point in ascertaining areas of business that are likely to pay off.
So I’m going to assume that the three Cs are satisfied in relation to financial planning for UK resident non-doms.
The reason I started banging on about UK resident non-doms as a client segment for whom paid-for advice would likely to be required was a recent piece of news from the law firm Pinsent Masons.
It reported that income tax paid by resident non-doms reached a record high level of £6.8bn in the 2011/12 tax year.
The amount has apparently risen by 19 per cent in three years.
The remittance basis charge alone raises about £178m a year, around 2.6 per cent of the total UK income tax paid by non-doms in one year. So tax is likely to be an issue for at least some non-doms.
The question is whether – Catherine Tate “Lauren” style – they are “bovvered” enough to want to do something about it. Well, it’s a bit subjective as it goes but you won’t know unless you ask. Put it out there, as it were.
So, with that in mind, any adviser with UK resident, non-dom clients has an opportunity to discuss:
- How the remittance basis charge works
- What the charge is or could be; and
- How it can be legitimately avoided, to the extent that investments that generate income and capital gains are held inside an offshore bond.
Of course, the arising basis of tax would also be avoided by virtue of the gains and income arising to the insurance company rather than the investor. Naturally, the “personalised bond” provisions need to be circumvented to avoid a yearly income tax charge but this should not be too difficult.
Also, it should be remembered that the remittance basis, if available to the investor, will not save a realised bond chargeable event gain from UK taxation. But it should also be remembered that the 5 per cent rule will help to avoid a chargeable event gain arising.
You just need to take care over the source of the funds invested into the bond (for example, any previously unremitted gains or income) to avoid any of the (otherwise tax- deferred) 5 per cent withdrawal being treated as a remittance if it’s received by the UK resident non-dom.
Subject to all of this, the offshore bond delivers a simple and effective shelter from UK taxation. Hold it in an excluded property trust – established while the settlor is non-UK domiciled and not deemed UK domiciled for IHT purposes – and the non-UK sited trust property (that is, the offshore bond) will be free of inheritance tax – even where the non-dom settlor could benefit under the trust and if they later become UK domiciled for IHT purposes.
Tony Wickenden is joint managing director of Technical Connection
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