Non-resident mortgages
Offshore benefits – Are you managing your wealth effectively?
Offshore banking
Historically, if you were a UK resident but non-UK domiciled then income and capital gains retained offshore could not be taxed in the UK unless/until “remitted”. As a general rule, any use or benefit obtained in the UK which results from funds retained abroad would count as a remittance.
Recent changes to UK tax rules, which took effect from 6 April 2008, mean non-UK domiciled individuals who have been UK resident for seven out of the previous nine tax years must now pay an annual charge of £30,000 if they wish to receive the benefit of income and gains remitted to the UK on this basis without their worldwide income being liable for UK tax. This charge is payable for each of the tax years in which they are claiming under the remittance basis.
However, if an individual’s combined foreign income is in excess of £30,000 per annum, they will be able to continue to benefit from banking offshore. If the £30,000 annual charge is paid, any income earned from offshore banking will only be taxable in the UK when remitted.
Individuals who have been UK resident but non-UK domiciled for less than seven of the previous nine years can continue to hold offshore deposits and only be subject to UK tax on income remitted to the UK without having to pay the annual charge.
All depositors enjoy gross payment of their interest on funds deposited offshore albeit that UK residents are liable for income tax in respect of such interest, subject to remittance basis treatment in the case of a non-UK domiciled resident (as outlined above). Moreover, EU resident depositors must authorize the details of their account to be supplied to the tax authorities in order to avoid paying the EU retention tax which, since 1st July 2008, has been 20 percent of the interest due.
As for offshore mortgages, the changes to the offshore mortgage rules are only applicable to new mortgages or where the terms of an existing mortgage are varied. UK resident but non-UK domiciled persons with existing offshore mortgages should continue to benefit from existing arrangements. For instance, they can continue to finance interest repayments on the mortgage using foreign income without this being treated as a remittance to the UK.
Offshore trusts
If you are UK resident but non-UK domiciled you can shelter assets from capital gains tax (CGT) in an offshore trust. Even UK assets can be sheltered. Capital gains made by the trustees are not taxed in the UK. Only if a “capital payment” (or distribution) is made to you will a tax liability arise, and this can be avoided by retaining the distribution outside the UK (on payment of the £30,000 annual remittance charge, if appropriate). No liability arises unless, and until, a capital payment is made.
Example of a UK resident non-domicile using a trust to purchase property
- Mr Jones, who is UK resident but non-UK domiciled, is considering purchasing a UK property for £1 million via an offshore trust. The property will be let to third parties.
- Assuming the property is eventually sold for £1.9 million there will be no CGT payable on the gain arising in the offshore trust. The gain (£900,000) will only become subject to CGT in the UK when a capital payment is made by the trustees to Mr Jones.
- If he receives a capital payment, Mr Jones will pay CGT on the £900,000 payment at a rate of 18 percent, which equates to tax of £162,000.
- By retaining the distribution outside the UK, Mr Jones can avoid liability to CGT subject to the payment of the £30,000 annual remittance charge.
- Alternatively, if Mr Jones is non-UK resident at the time the distribution is made by the trustees then he will have no liability to UK CGT whatsoever as non-UK residents do not pay CGT.
However, income tax will still be payable on rental income derived from UK property even if the property is held by an offshore trust.
If you are UK resident and UK domiciled you can still use an offshore trust to shelter assets from CGT, but you, your spouse, children and grandchildren must all be excluded from benefiting from the trust. In other words, the trust can only benefit non-lineal relatives, friends and other third parties. Again, there is no tax payable when trustees make capital gains. Tax is only payable if these gains are distributed to UK resident beneficiaries (who may still avoid being taxed if they themselves are non-UK domiciled and pay the £30,000 annual remittance charge).
Non-UK domiciles resident in the UK can also create a trust to hold non-UK assets, which can remain outside the scope of inheritance tax, (IHT), even if the individual subsequently becomes UK domiciled. (Any non-UK domiciliary who has been resident in the UK for 17 of the past 20 years will be deemed to be UK domiciled for IHT purposes and, once they are UK domiciled, their worldwide estate will come within the scope of UK IHT.)
This situation can be avoided by setting up an excluded property trust, and transferring certain assets into the trust, prior to the individual becoming a UK domicile.
Any non-UK assets transferred to the trust will be outside the scope of IHT. IHT may also be avoided on UK property if the property is transferred to an offshore company which is itself owned by the trust. Again, the transfer must take place before the individual is deemed to be domiciled in the UK. The key to this structure is that the trust owns shares in an offshore company, which is a non-UK asset and, as such, excluded from the scope of UK IHT.
It should be noted that, unless the trust is an excluded property trust for IHT purposes, IHT charges will arise at six percent every ten years on the value of the trust assets.
Offshore companies
If you are non-UK domiciled but wish to own assets which are legally situated in the UK, such as land or UK company shares, then these assets will be exposed to IHT on your death. This exposure can be avoided by holding the assets in an offshore company. (If the asset consists of your main residence in the UK, this might create other tax issues which would need to be managed carefully so further advice should be sought in such circumstances.)
Similarly, if you are non-UK resident and own UK property which generates an income then this income will be exposed to UK tax at a maximum rate of 40 percent. This exposure can be reduced to 20 percent by owning the property in an offshore company.
Example of a non-UK resident and/or non-domicile owning UK assets
- Mr Gates, who is neither UK resident nor a UK domicile, is considering purchasing a UK property. If the property is purchased via an offshore company the liability to UK taxation on the rental income can be restricted to 20 percent for as long as he remains a non-UK resident.
- There will be IHT benefits to Mr Gates if he holds the property via an offshore company as any UK property held directly by Mr Gates will be subject to 40 percent IHT on his death. If UK property is held via an offshore company, the asset included within Mr Gates’ estate on death is shares in an offshore company, a non UK asset. Consequently, no IHT will be payable on the UK property on death.
If you are UK resident but investing into UK property, and wish to do this through a company, an offshore company will almost certainly be more tax efficient than a UK company. This is because a UK company pays corporation tax at a maximum rate of 28 percent on any profit on the sale of the company and further tax of either 18 percent or 25 percent on any extraction of the proceeds from the company.
Therefore, the cumulative tax burden is 41 percent if the company is wound up after making the disposal, or 46 percent if it pays you a dividend. If, instead, an offshore company is used the individual CGT rate of 18 percent will apply to the capital gain provided the proceeds are distributed by a liquidation of the company within three years.
Example of a non-UK domiciled UK resident individual using a company to purchase property
- Mr Cook, who is UK resident but non-UK domiciled, is considering purchasing a UK property via an offshore company. The property will be let to third parties.
- Supposing the company purchases a property for £1.2 million and eventually sells it for £2.7 million (realizing a profit of £1.5 million), the resulting tax liability would be as follows:
Sale of property by UK Company followed by a dividend extraction of the profits on sale
Amount UK tax payable
Gain on disposal of the property by the UK company (tax at 28 percent) £1,500,000 £420,000
Dividend extraction (UK higher rate tax at an effective rate of 25 percent) £1,080,000 £270,000
Total tax paid £690,000
Sale of property by UK Company followed by a liquidation of the Company by Mr Cook
Amount UK tax payable
Gain on disposal of the property by the UK company (tax at 28 percent) £1,500,000 £420,000
Liquidation of the company by Mr Cook, the company’s value being the gain of £1.5 million less the tax already paid of £420,000 (tax at 18 percent) £1,080,000 £194,400
Total tax paid £614,400
Sale of property by offshore company followed by a liquidation of the company by Mr Cook
Amount UK tax payable
Gain on disposal of the property by the UK company (tax at 18 percent) £1,500,000 £270,000*
Liquidation of the company by Mr Cook (the company’s value being the gain of £1.5 million less the tax already paid of £270k £1,230,000 nil
Total tax paid £270,000
* UK CGT payable by Mr Cook personally when the property is sold by the offshore company
An offshore company can also be used to shelter from CGT arising on the sale of assets other than UK land (such as, private company shares) or from non-UK assets. This is achieved by using another company incorporated in a country with which the UK has a suitable double tax treaty. The effect is to defer the tax on the capital gain arising until the proceeds are paid out as a dividend. This tax can, in turn, be avoided by being non-UK resident at the time.
Offshore policies
A policy taken out with a non-UK insurance company is a highly tax efficient savings vehicle. Provided the policy is not what the tax authorities would regard as a highly personalized bond, the investment return within the policy can be rolled up tax free. Tax only arises at the point at which the policy is surrendered, encased, etc., or otherwise matures, and then only if the policyholder is UK resident at the time.
In addition, a tax free annual withdrawal of up to five percent of the initial capital is available, thereby generating an effective tax free income stream.
Non-UK domiciled policyholders are not required to pay the £30,000 additional remittance charges (even if otherwise appropriate) in order to enjoy the benefits of gross roll up or five percent withdrawal described above.
Example of a non-UK domiciled but UK resident investing in offshore life policies
- Mr Osborne is a non-UK domiciled individual who has lived in the UK for more than seven consecutive years. Consequently, he is required to pay the £30,000 annual remittance charge in order to avoid paying UK income tax on his foreign income except to the extent the amount is “remitted” to the UK. Mr Osborne’s only foreign capital is £400,000 which he wants to invest in a tax efficient manner. Clearly, paying the annual charge will not be economical for Mr Jones.
- Mr Osborne places the foreign capital, totaling £400,000, in an offshore bond which matures in 20 years time. This allows him to make an annual withdrawal of five percent (£20,000) of the initial value of the bond tax free, even if the funds are brought into the UK. Any gains or income arising within the bond are not subject to tax in the UK so long as the bond remains in existence and he does not withdraw more than five percent of the initial premium annually.
- Mr Osborne will pay UK income tax when the bond matures, is surrendered or enchased at a rate of 40 percent (assuming he is a higher rate tax payer and remains UK resident).
The bond matures after 20 years and the value of the bond on maturity is assumed to be £800,000.
Amount UK tax payable
Annual withdrawal of 5 percent £20,000 nil
Maturity of the bond (maturity value assumed to be £800,000 of which £400,000 is the original capital) £400,000 £160,000
- However, if Mr Osborne owns the bond via an offshore company then he can sell the shares in the company immediately prior to maturity of the policy. This avoids the income tax liability on maturity. The sale of shares would be a chargeable gain and, therefore, subject to capital gains tax at a rate of 18 percent.
Amount UK tax payable
Sale of the offshore company (gain on the company assumed to be £400,000) £400,000 £72,000
- Alternatively, if the gain were high enough Mr Jones can avoid CGT by not remitting the proceeds to the UK and paying the £30,000 annual charge.
Amount UK tax payable
Sale of the offshore company (gain on the company assumed to be £400,000) £400,000 £72,000 (or £30,000 if the remittance basis is claimed)
- It is worth noting that if Mr Osborne leaves the UK before the bond matures, he can encash the bond without having to pay any UK tax. (If this option is to be followed there is no requirement to hold the bond though an offshore company.)
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Please find below links to the agreement in principle, accountants certificate and a document which details what we need to to provide us if you would like to apply for an offshore mortgage:
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Please complete these documents and email them to info@investaco.co.uk, alternatively if you have any queries please phone 0800 32 88 013.
The Financial Services Authority does not regulate offshore mortgages and taxation and trust advice
Changes in the exchange rate may increase the sterling equivalent of your debt.
These are examples and for information only. This is not to be taken as financial advice and we recommend that you seek advice pertinent to your own individual situation before embarking on any course of action.
Levels, bases of and reliefs from taxation are subject to change and their value depends on the individual circumstances of the client.
For more information, please contact us