Planning for Foreign Domiciliaries Resident in the UK and Filing on the Remittance Basis

It is not unusual for foreign domiciliaries living in the UK to have established large private retirement funds in respect of their UK employment or self employment.

There are no special rules for foreign domiciliaries in respect of UK registered pension schemes, who will enjoy the same tax breaks in respect of funding as will a person who is domiciled in the UK. Consequently pension income, when it is drawn, will be regarded as having a UK nexus and, therefore be subject to UK income tax at the tax payer’s highest marginal rate.

Foreign source income (including income from foreign pension schemes) may, however, avoid taxation in the UK when received overseas by an individual filing on the remittance basis of taxation.

The remittance basis rules were due to change from April 2017 when UK resident foreign domiciliaries will pay UK tax on worldwide income and gains once they have lived in the UK for 15 out of the past 20 tax years. The new rules should have been applied from 6th April 2017 to those who have been living in the UK for 15 tax years at that date. However, these have been deferred until a later date following the UK general election in June 2017.

Pension freedoms, introduced in the UK on 6th April 2015, now give much greater flexibility to all individuals with UK registered pension schemes in respect of how they can draw their pension benefits. Under the new legislation, these freedoms are passed to certain overseas pension schemes which are recognised by HMRC as being able to accept transfers from UK registered pension schemes.

This creates opportunities for non domiciled individuals, both resident and non-resident in the UK to transfer their pension rights outside the UK income tax system while still benefitting from the greater flexibility now afforded to UK tax relieved pension savings.

Fact Patterns which may benefit

Generally, there are 3 fact patterns that may benefit from a transfer to a suitable overseas pension scheme:

  1. Foreign domiciled individuals whose UK tax relieved pension savings are approaching their available lifetime allowance.
  2. Foreign domiciliaries living in the UK and claiming the remittance basis of taxation.
  3. Foreign Domiciliaries who have left the UK (and are no longer subject to UK income tax).

Planning opportunities for those electing for the Remittance Basis of Taxation

Following changes to UK income tax rules it is possible to take income withdrawal from a flexi-access drawdown pension fund through either the drawdown of assets or through the purchase of a short term annuity contract with a term of less than 5 years. This option is currently possible only in Malta and not in Gibraltar, the Isle of Man or Guernsey.

In light of the reform to the non domicile regime this planning will be attractive to remittance basis users who will not have spent more than 15 years in the UK during the tenure of the annuity contract. Individuals who will be over the 15 year limit on 6th April 2017 will also be able to benefit.

International Pension Plans (IPPs)

Correspondingly approved international pension plans were an extremely popular deferred compensation tool used by foreign employers to fund retirement benefits for foreign domiciled employees working in their UK businesses prior to A Day on 6th April 2006.

As a general rule it is possible to transfer rights under these schemes to the Dominion Malta international pension plan without there being a UK income tax charge. This plan can then generally provide retirement benefits to the individual through the purchase of a short term annuity contract.

Considerations for the Dominion Malta International Pension Plan

  • The plan is able to provide pension benefits in accordance with recognised pan European pension legislation which has been adopted by Malta and extended to personal retirement plans so benefits from protection under non discrimination laws and European Fundamental Freedoms.
  • The administration of the Dominion plan is carried out in Malta by experienced in house technical trust, pension and tax specialists