One of the major announcements in this year’s Spring Budget was news that the current tax regime for ‘non-domiciled’ UK residents is changing. For ‘non-doms’ out there, it’s worth understanding what changes are being introduced – and when – and the implications from a tax perspective.

The current remittance basis regime

At present, the remittance basis of taxation means temporary residents only pay UK tax on the income and capital gains brought into the UK, not on any worldwide income or gains. However, the Chancellor announced that the remittance basis will come to an end from April 2025. Its replacement is the FIG (foreign income and gains) regime.

Under the new FIG rules, any foreign income and gains realised during the temporary resident’s first four tax years of residence in the UK will be tax-exempt. But after four years, they will be required to pay the same income and capital gains taxes as regular UK taxpayers.

From a tax planning perspective, this could make life in the UK much more expensive, particularly for high-net-worth individuals who accumulated wealth outside of the UK and were working on the provision that those assets would not be taxed.

There are various tax planning opportunities in the UK, that can be considered to help.

For non-domiciled (non-dom) individuals in the UK, effective wealth management can be a complex challenge due to the unique tax circumstances they face. While there are various strategies to help minimise tax liability and achieve financial goals, one solution worth considering is the use of offshore bonds.

What Are Offshore Bonds?

Offshore bonds are investment wrappers issued by life insurance companies based outside of the UK. Since the 1960s, these structures have been popular among both UK and non-UK savers for their unique combination of tax benefits and investment flexibility. They can be an especially powerful tool for temporary UK residents seeking efficient ways to grow and access their wealth while minimising tax exposure.

Benefits of Offshore Bonds for Non-Doms

Offshore bonds offer several key benefits, which can be particularly advantageous for non-doms in the UK:

1. Tax-Deferred Growth

The growth within an offshore bond is typically free from UK tax until you make a withdrawal. This means that, unlike direct investments, there is no ongoing tax liability on gains, interest, or dividends while the money remains in the bond. This feature allows investments to grow without the annual drag of tax on earnings.

2. Flexibility in Investment Choices

Offshore bonds provide access to a wide range of investment funds, allowing investors to tailor their portfolios according to their risk tolerance and financial objectives. Whether you prefer cautious investments or a more aggressive approach, offshore bonds give you the flexibility to build a portfolio that aligns with your personal goals.

3. Tax-Free Access to Capital

One of the most significant advantages of an offshore bond is the ability to withdraw up to 5% of the original investment amount each year without triggering an immediate tax liability. This annual 5% capital allowance can be carried forward if not used, providing an excellent opportunity to access funds tax-free for up to 20 years.

By planning withdrawals around this 5% annual allowance, non doms can defer taxes on both income and investment gains, creating a highly tax-efficient solution while residing in the UK.

How Offshore Bonds Can Work for Temporary UK Residents

Consider a scenario in which a non dom invests in an offshore bond. As long as they limit their withdrawals to 5% of the original investment per year, they will avoid paying UK tax on both the capital and any accrued gains. This strategy can be employed for up to 20 years—after which point any further withdrawals will be subject to tax unless additional planning steps are taken.

If the investor leaves the UK before using the full 5% allowance, they can continue withdrawing funds from the bond without UK tax liability, provided they are no longer a UK tax resident. However, it’s crucial to take into account the tax rules of their new country of residence, as these withdrawals may be taxed differently depending on the jurisdiction.

The Role of Offshore Bonds in a Holistic Financial Plan

While offshore bonds are a powerful tool, they are not a one-size-fits-all solution. The value of an offshore bond lies in its role within a broader, holistic financial plan designed to address an individual’s specific circumstances and objectives.

Offshore bonds may also be considered alongside other potential solutions, including:

• Gifting Bond Units: In situations where withdrawals exceed the 5% annual allowance, bond units can be gifted to lower-rate taxpayers, effectively reducing the tax impact on gains.
• Using Trusts for Estate Planning: Offshore bonds can also be useful when combined with trust arrangements, potentially shielding profits from tax under certain proposed regulations, such as the Foreign Investment Gains (FIG) regime.

Overcoming Challenges: The Remittance Basis and Changing Rules

Recent changes to the remittance basis rules have posed new challenges for non-doms residing in the UK. However, it remains possible to optimise tax outcomes by employing strategic financial planning. Offshore bonds provide an avenue for tax-efficient investing and allow temporary residents to access income in a manner that minimises tax exposure during their time in the UK.

Get Professional Guidance on Offshore Bonds

In the right circumstances, an offshore bond will now be a very attractive for non-UK domiciliaries. Offshore bonds are just one of many tools available to help you manage your wealth effectively. If you’re a temporary UK resident or non-dom and would like to explore how offshore bonds could fit into your financial plan, get in touch.

Spring Budget March 2024

It is very important to note that the Government, in Spring Budget 2024, stated it considers the concept of domicile is outdated. The Government is therefore modernising the tax system by ending the current rules for non doms from April 2025.Liability to IHT also depends on domicile status and location of assets. Under the current regime, no IHT is due on non-UK assets of non-doms until they have been UK resident for 15 out of the past 20 tax years. The government will consult on the best way to move IHT to a residence-based regime. Decisions have not yet been taken on the detailed operation of the new system, and the government intends to consult on this in due course.