Please note the following is for information only and should not be acted on without taking professional advice.

In March 2024 it was announced by then chancellor Jeremy Hunt, that the UK resident non-domiciled (RND) tax regime would be abolished and replaced with a new tax system providing tax advantages for new arrivals into the UK. More detail was provided following new Chancellor Rachel Reeve’s budget speech in the Autumn of 2024.

The changes will go ahead from 6 April 2025.

What does this mean for existing RNDs?

Unless they have been in the UK for less than 4 years on 6 April 2025, RNDs will begin paying income tax on worldwide income and capital gains tax on worldwide gains. The remittance basis of taxation provided for RNDs to legitimately avoid or defer UK tax on non-remitted income and gains providing they made a claim and in many circumstances paid an annual tax charge of £30,000 or £60,000 p.a. The remittance basis will no longer be available from 6 April 2025.

What about trusts?

RNDs who are settlors of non UK trusts will in many cases become taxable on income and gains arising in those trusts from 6 April 2025. Tax will apply where the RND has retained an interest in the trust but this can include the situation where a spouse or minor child has an interest in the trust; the definition of a retained interest can be very wide ranging.

How does this impact an investment portfolio?

For an RND who has been claiming the remittance basis and has an investment portfolio that includes non UK shares, bonds, funds or cash deposits, they will have to pay tax on any resulting income or gains from 6 April2025. For an RND who is a settlor with a retained interest (or beneficiary) of a non-UK trust, they may have to pay tax on any resulting income or gains from 6 April 2025.

What planning should RNDs consider?

Since Jeremy Hunt’s announcement last March there has been a resurgence of interest in the International LifeAssurance Bond (ILAB) also known as an Offshore Bond. ILABs have been available and widely used in planning by UK resident and domiciled individuals for over 30 years.

An ILAB is a tax efficient investment portfolio wrapper set up by a life assurance company in a jurisdiction with a favourable tax regime; a life assurance bond that goes around an investment portfolio and changes the way in which it is taxed. There are a number of ILAB providers based in Ireland, Luxembourg and the Isle of Man.

Instead of income and gains being taxed on an arising basis, tax is deferred and payable when something knownas a chargeable event occurs, principally when the ILAB is surrendered back to the life assurance company, when the initial capital investment has all been withdrawn or when the last life assured dies.*

An example

Jerome, a RND, has a portfolio managed on a discretionary basis by a UK discretionary fund manager. The portfolio consists of non-UK shares and bonds held in an ILAB issued by XYZ International.

Jerome funded the bond originally before he became UK tax resident with a cash deposit of £5m. Each year for 25 years Jerome withdraws £200,000 (4%) which he spends in the UK. In year 26 when Jerome withdraws £200,000 this will be added to his other UK income for the year and taxed accordingly.

What about trusts?

If a trust holds a portfolio which invests in non-UK shares and bonds then a UK resident settlor may betaxable on income and capital gains from 6 April 2025. If the trust holds the portfolio within an ILAB thenincome and gains may accumulate without UK tax until a chargeable event occurs.

In the case of a trust, the chargeable event rules apply the tax charge to the settlor of the trust. If thechargeable event occurs in a tax year following that in which the settlor died, or if the settlor is non UKresident, then the tax charge is levied on the trustees. If the trustees are non UK resident, then the tax chargemay fall on any UK resident beneficiary of the trust as and when they receive a distribution.

The 5% withdrawal and remittance to the UK

The tax rules applying to ILABs allow up to 5% of the initial premium to be withdrawn each year without tax until the original capital is withdrawn in full. For RNDs there is an additional layer of complexity; the remittance rules operate in addition to the 5% withdrawal rules, meaning that if the ILAB is funded with capital containing income and/or gains, when the RND withdraws 5% and remits this to the UK it will trigger a tax charge. If the RND withdraws 5% and does not remit it to the UK then UK tax should not arise.

Conversely if the ILAB is funded with clean capital a remittance should not arise if the RND withdraws 5%and remits it to the UK.

It is also generally possible to invest funds held in an ILAB into UK securities under a discretionary mandate without creating a remittance.

The temporary repatriation facility will provide an opportunity for previous RNDs to repatriate capital, paying tax at 12% on any previously unremitted income or gains. This capital could then be used to fund an ILABand to take advantage of the 5% withdrawal facility.

Do any investment restrictions apply to ILABs?

The assurance company issuing the ILAB will have its own investment restrictions which will need to be followed by any underlying discretionary portfolio manager.

In addition ILAB holders and their advisors should pay close attention to the highly personalised bond rules(known as the Personal Portfolio Bond [PPB] regime) which have applied since 6 April 2000 and which apply tax at 45% on an annual deemed gain of 15% of the original premium plus previous PPB excesses. The tax charge applies irrespective of whether the underlying ILAB has increased in value.

The PPB rules will apply where the policyholder is able to select the underlying property held in the ILAB unless the underlying is restricted to categories defined by HMRC which include unit trusts, open ended investment companies, investment trusts and cash deposits. This means a policyholder can in theory select and manage a portfolio of suitable collective investments under their own ILAB without this being a PPB, although not all collectives will qualify.

Also excluded from the PPB charge is property appropriated by the insurer to an internally linked fund, but here the fund must be marketed and made available to other policyholders to invest in and the property held in the fund must not be personal to the policyholder.

It is generally accepted that if the investments held in the ILAB are selected by a discretionary investment manager then the policyholder cannot select the underlying investments and hence the ILAB cannot be a PPB. However care should be taken to ensure that the discretionary manager is indeed selecting the investments. Problems may arise where instead of a cash premium used to establish the ILAB, individual shares or bonds are transferred “in specie” into the ILAB. HMRC might argue that the policyholder can select the underlying property in the ILAB as they have selected the shares to be transferred in.

Alternatives

Part of our advice process is to consider whether the ILAB is suitable or whether a different solution may be moreappropriate. ILABs are not perfect; there are investment restrictions that do not suit everyone (see above) and on asurrender whilst the ILAB holder is UK resident, income tax of up to 45% applies to any gain, despite the fact thatcapital gains tax at 24% might otherwise apply to many of the underlying holdings if held directly.

It might be that a low yielding portfolio of high growth securities or umbrella funds with a very low number oftransactions is satisfactory or a family investment company. At a significant investment level it is worth consideringa private fund or a protected cell company.

The advice process

ILABs are life policies which are categorised as packaged products by the FCA and therefore advice on ILABs to retail customers is regulated by the FCA. Professional advisors who are not FCA regulated or not part of anFCA regulated firm should introduce clients who have expressed an interest in an ILAB to a suitably qualifiedFCA registered advisor who is able to chose from the range of available ILAB providers.

Financial Services Compensation – what happens if the ILAB provider goes bust?

ILABs issued in Ireland, Isle of Man and Luxembourg are not covered by the UK Financial Services Compensation Scheme.

There is no correspondingly equivalent compensation scheme in Ireland. Instead the Irish authorities rely on robust financial regulation set out by the Central Bank of Ireland.

• Solvency capital requirements set the reserves that must be held separately from other assets of the company in excess of policyholder liabilities
• Policyholder assets are held separately from those belonging to shareholders
• There can only be restricted exposure to volatile assets
• Policyholders are paid in priority to all other claimants other than the costs incurred in winding up the company

The Isle of Man has its own policyholder compensation scheme that covers up to 90% of the insurer’s liability one ach individual’s policy, irrespective of where the policyholder resides. However, money is not collected in advance to fund compensation payments. Compensation is paid out of contributions collected from the other participant insurers following the failure of the insurer.

Furthermore, the Isle of Man’s Financial Services Authority’s solvency framework requires that all Isle of Man insurers make provisions which are expected to allow all policyholder liabilities to be met as they fall due for payment. The Isle of Man insurance regulations also require that insurers hold a minimum level of solvency capital over and above these provisions.

Luxembourg does not have any policyholder compensation scheme but instead relies on the “Triangle of Security.”

• Policyholders rank as “super” creditors ahead of the State and employees
• Assets are deposited with a separate custodian bank and held off balance sheet
• The term “Triangle of Security” refers to the tripartite relationship between the Insurance Company, the custodian bank and the Commissariat aux Assurances (the official Luxembourg body responsible for monitoring the insurance sector) materialised by a custody agreement

Charges

There are broadly 3 layers of charges that apply in relation to ILABs.

The ILAB provider charges. These can range from .08% p.a. to .2% p.a. based on the amount under investment. The charges depend on the amount invested and the type of product selected. E.g. ILABs that only permit collective investments are typically cheaper then those that permit discretionary investment into individual securities. The ILAB can be portable within the EU for individuals that change residence; this increases the cost but it is still within the range above. There are also quarterly administration fees from £280 per quarter.

The advisor charge. We cannot comment on what other advisors in the market may charge but Birchin Lane will charge an initial flat fee of £7,500 + 5bps per £m above £1m.** E.g. an ILAB of £5m would cost £9,500 and a £10m ILAB would cost £12,000. This is to advise on and set up an ILAB. VAT is not payable where the fee facilitates the set up of an insurance or pension product, as it does here.

Discretionary manager charge. This is typically in the region of 1% p.a. but again depends on the amount invested and the manager selected. This charge is not specific to the ILAB; you would pay it in any case if you had a discretionary managed portfolio. Indeed if you invest through an ILAB issued by an Irish based ILAB provider then you should save VAT on the discretionary management charges even if you subsequently move from the UK to an EU country and take the ILAB with you.

*Does not apply to capital redemption bonds which have no life assured.

** please note that the first £2,500 is for analysis of what type of wrapper is most appropriate. If this is not an ILAB then no further fees may apply or a bespoke fee can be agreed at that time to advise on, say, a private fund set up.

Contact us

Ken Chapman
Ken.chapman@birchin-lane.com
+447506 0792803

David Beck
David.beck@birchin-lane.com
+44203 9875303

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