Impact on Portfolios for European Wealth Planners & Managers
(Summary overview, for European intermediaries, of the Draft UK Legislation published on 5th December 2016 for the 2017 Finance Bill)
From 6th April 2017, UK Resident Non-Domiciles (UK RNDs) who have been resident in the UK in 15 of the previous 20 UK tax years will become ‘Deemed-UK-Domiciled’. They will become liable for UK Income, Income Gains, Capital Gains and Inheritance Tax purposes on their global assets. Previously, a ‘Deemed-UK-Domicile’ status only concerned UK Inheritance Tax. Going forward, all investment returns of portfolios held outside of the UK (and chaperoned/managed/advised by you) will be liable to UK taxes on an arising basis (reportable in the client’s annual Self-Assessment Tax Return). The Remittance Basis election will not be available. This presents a major change and demands that all intermediaries look to the structuring solutions freely available to their clients.
The draft legislation covers many areas of taxation including; returning ‘Non-Doms’ born with a UK domicile of origin, Offshore Trusts and UK residential real estate beneficially owned by foreign nationals. However, the purpose of the following note is to highlight the impact of future taxation upon non-UK portfolios of bankable assets.
UK tax upon portfolios managed in Switzerland, Luxembourg, Monaco, etc
UK RNDs have been able to claim the ‘Remittance Basis’ of taxation; that is a UK Income, Income Gains & Capital Gains tax liabilities did not arise on overseas portfolios retained outside of the UK.
Depending upon the clients’ circumstances the remittance basis claim could be free or cost an annual election fee (£30k, £60k or £90k).
From 6th April 2017 ‘Deemed-UK-Domiciles’ will incur the following taxes on their directly held portfolios managed by you
- Income Tax (at rates of up to 45%) on income, interest, dividends, coupons, etc.
- Income Gains Tax (at rates of up to 45%) on Income Gains.
- Income Gains tax applies to all profits (including capital gains) from offshore collective investment schemes where the scheme does not comply with HMRC’s definition of a ‘Reporting Fund’. In effect; the tax applies where a scheme denies HMRC the ability to tax/view the natural yield of underlying assets. Alternative/Hedge Funds are typically ‘Non-Reporting’ but many collective schemes are caught. Scheme status should be sought.
- Capital Gains Tax (at rates of up to 20% on all realised gains).
Is your client aware of these forthcoming liabilities?
To reiterate; any UK RND that has lived in the UK for 15 tax years or more (out of the last 20) will be liable to these taxes on directly held non-UK portfolios from 6th April 2017. Does the client realise the future impact of these taxes on investment returns and the potential considerations for you as the portfolio manager? Furthermore; knowing of a tax is one thing, paying it is another.
When will the first tax bills fall due?
Despite these new liabilities being applicable from 6th April 2017 (less than 4 months from now) the deadline for the first inclusive tax payment will not be until 31st January 2019 (over 2 years away).
What reaction might the client exhibit if in 2 years’ time they only then realise the impact of a 45% tax bill on the natural yield of their portfolio; an impact that could have easily been avoided?
The value of tax deferral for UK RNDs
There is an old adage that “tax deferred is tax saved”. Whatever the ultimate taxation of the portfolio, the deferral of tax should assist the compound growth.
However, tax deferral is of even greater importance when
- The client will pass the assets to an heir that may or may not be exposed to UK tax
- The client will leave the UK and never need have paid UK taxes on a foreign portfolio.
Life Insurance (as a defensive shield against arising taxes)
Life policies are ‘Non-Income producing assets’ for all UK residents. They are free of tax and reporting obligations unless a ‘Chargeable Event’ occurs. Benefits for UK RNDs include
- Tax deferral on arising income, income gains & capital gains to a portfolio
- The protection of clean capital whilst invested in active risk assets
- Tax deferred withdrawals within the cumulative ‘5%’ allowance
2 Wealth Planning concessions confirmed within the draft legislation for 2017
Interpreted as measures to ease the pain of the new UK RND regime, the Government have confirmed the introduction of two valuable planning concessions
1/. A ‘One-Off’ free Capital Rebasing of Foreign Assets
Available for those becoming ‘Deemed-UK-Domiciled’ on 6th April 2017, this ‘one-off’ free rebase of foreign assets is to their market value on 5th April 2017. Eligibility includes
- assets being held directly and not through structures
- the client having claimed the Remittance Basis in at least one tax year
NB the concession does not extend to those capital gains being taxed as ‘Income Gains’
2/. Cleansing of Mixed Funds
Available to all UK RNDs (not just those becoming ‘Deemed-UK-Domiciled’ on 6th April 2017) with the aim of enabling, as tax efficiently as possible, the remittance of assets into the UK. Mixed Funds can be ‘rearranged’ into their constituent parts where
- assets are ‘fungible’ i.e. bankable
- there is a clear audit trail to support the origin and status of assets
NB the concession is available for the 2017/2018 and 2018/2019 tax years
Individual client circumstances will determine whether advisers suggest action before or after 6th April 2017. Given that the new regime is less than 4 months away there is little time to lose.
Philip Tarplee is a Director of IIII Ltd. IIII Ltd is regulated by the UK Financial Conduct Authority
The content of this memorandum is solely intended for information purposes and is not to be construed as a solicitation or an offer to buy or sell any life assurance product. Neither is the information intended to constitute any form of legal, fiscal or investment advice and it should therefore not be used to replace appropriate professional advice obtained from a suitable qualified professional source. No representation or warranty, express or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein. IIII Ltd is not authorised to give financial advice.