As companies from advertising giant WPP to fund firm Old Mutual warn they may
move offshore to cut their tax burden, many individuals are doing the same
with their personal finances.
The offshore arms of British life insurers have been reporting a surge in
business from UK investors, with figures from the Association of British
Insurers showing sales of offshore investment bonds alone soaring 61% in
three years to £7.9 billion in 2007.
It is not just offshore investment bonds, that have been winning the hearts of
UK investors.
Offshore deposit accounts are competing with building societies, and you can
now even take your pension offshore and benefit from higher tax-free cash,
invest in residential property and even avoid buying an annuity.
Beating the taxman is not just a case of putting your money with a
brass-plated institution operating from a low-tax jurisdiction.
In recent years the Revenue has got tough on offshore accounts, and as long as
you remain resident in Britain you will be taxed on income and gains under
UK rules. However, there are some products that can offer advantages to
people resident in the UK as well as expats.
People considering offshore products usually fall into one of three
categories. Expats can get considerable benefits from taking out offshore
bonds, savings accounts and pensions.
Then there are the millions of people planning to retire abroad. For them,
offshore products can offer benefits if the country they are planning to
retire to has a more benign tax regime than the UK because they can defer
tax on their gains until they have relocated.
For example, Cyprus charges pensioners income tax of just 5%, while Dubai and
Portugal both have more attractive regimes than in Britain.
Popular destinations such as France and Spain, on the other hand, have complex
systems which mean that you need to get specialist advice before you take
your money abroad.
The third group is UK residents who have no plans to emigrate. While offshore
products are generally of no benefit to this group, there are still some
situations where taking your cash offshore can make sense.
SAVINGS
Offshore savings accounts regularly offer even UK residents slightly higher
rates of return than their domestic counterparts.
Isle of Man-based Kaupthing Singer & Friedlander, for example, offers
6.65% gross on its no-notice account, beating the highest-paying UK account,
currently Birmingham Midshires’ esaver which tops the domestic tables with a
rate of 6.5%.
Offshore banks do not offer the same security as those in Britain, though. You
are only guaranteed to get £15,000 of your cash back if a bank on the Isle
of Man collapses, compared with compensation of £35,000 in the UK.
Gibraltar banks are guaranteed up to 90% of £18,000 on deposit, while those
based in the Channel Isles have no guarantees.
“Some offshore banks offer slightly higher rates, but you have to take into
account the guarantees, and none have a track record of staying at the top
of the tables,” says Rachel Thrussell at comparison site Moneyfacts.
Income is paid gross, but if you are resident in Britain you must declare it
on your tax return annually, meaning there is also little tax benefit.
Deferred accounts, however, are particularly useful to people who in the
future expect to pay a lower rate of tax than they do at the moment, such as
contract workers with irregular income or people approaching retirement.
While interest on regular offshore accounts is taxable along with your other
income in the year it is paid, with deferred products interest is paid gross
and you can wait until you close your account to receive your income.
For example, a higher-rate taxpayer with £100,000 in an offshore deferred
account paying 6.25% a year would earn interest of £83,353 after 10 years,
compared with £44,504 in a UK account. If he or she is a basic-rate taxpayer
at the time they take the money out they will still be left with £66,682
after paying tax, a saving of £12,118.
INVESTMENT BONDS
Offshore investment bonds can be attractive to expats and those considering
moving abroad, provided the tax regime to which they are moving is more
benign than Britain’s, because they allow you to roll up your gains gross
and benefit from the compounding of returns.
UK-based investment bonds, on the other hand, deduct tax on gains of around
20% each year at source, causing a drag on performance when compared with
their offshore counterparts.
If you invested £50,000 in an onshore bond, you would have a lump sum of
£72,294 after 10 years with growth of 7% a year, according to SG Hambros, a
private bank.
If you invested the same amount in an offshore bond, however, you would have
£72,833 at the end of the term — an extra £539 because your gains would have
rolled up gross.
The figures assume that the higher-rate tax is paid in each case, but if you
move to a country with lower taxes your gain will be even higher.
You can also take an income of up to 5% a year from a bond — onshore or
offshore — with no immediate tax to pay.
It is added to your gains when you cash in the bond and is then taxed at your
highest rate.
A higher-rate taxpayer could therefore wait until they have retired to a
country with lower taxes — and would probably be earning less anyway.
Even if you stayed in Britain, there are perks.
A UK investor could benefit from offshore bonds if their investment was
generating income rather than growth, according to new research from
Fidelity FundsNetwork, a funds supermarket.
For investments generating income, such as cash on deposit, corporate bonds
and gilts, an offshore bond will return typically 5.5% more over 10 years
than the same investments held in an onshore bond.
This figure is net of charges and the costs of financial advice, however, both
of which tend to be higher for offshore products.
For growth investments such as equities and property, though, the onshore bond
performs better, although many advisers prefer to avoid investment bonds
altogether and invest directly in unit trusts and open-ended investment
companies (Oeics) since the chancellor reduced capital gains tax to 18%.
There are pitfalls and you should get professional advice before migrating
your finances.
Australia, for example, can levy arbitrary tax charges on some offshore bonds.
Spain and France also have complex local laws that can affect your offshore
bond.
PENSIONS
Offshore pensions are a relatively new concept, which have developed as a
result of a major liberalisation of rules introduced in April 2006.
The introduction of the qualified registered overseas pensions scheme (QROPS)
rules has offered emigrating investors desperate to avoid the perceived
inflexibilities of the UK retirement savings regime an attractive list of
benefits when they move their plans offshore.
These include increased tax-free cash, improved death benefits, no compulsion
to buy an annuity and freedom to invest in residential property.
These advantages are only available to those retiring abroad or who are
already expats.
Last month the Isle of Man introduced new pension rules that allow pension
investors access to 30% tax-free cash, rather than the 25% allowed in
UK-domiciled schemes. The Isle of Man schemes also allow investment in
residential property, and do not require the purchase of an annuity at the
age of 75.
What’s more, if you die before you are 75 while in an income-drawdown scheme,
then inheritance tax on the fund in the Isle of Man is just 7.5%, compared
with 35% in Britain.
Whether based in the Isle of Man or other jurisdictions, such as Singapore,
Hong Kong and the Irish Republic, which all offer extremely liberal tax
structures, QROPS schemes only require the provider to report dealings
within your fund to the Revenue for five years. After this there are no
reporting requirements at all.
QROPS plans can work well for people moving to certain retirement
destinations.
But as with savings and investment products, taking your pension offshore is
not all plain sailing because you always have to take into account local
taxes.
Cash in your pension in France, for example, and you won’t be allowed any
tax-free cash at all, while local income taxes in Spain and Italy can leave
pensioners worse off than at home.
UK tax rules are complex enough, and attempting to dovetail our domestic
regulations with those of foreign countries is a complicated matter. Get it
right, though, and you could be laughing all the way to a foreign bank.
When going offshore pays:
— Deferred-interest accounts can delay tax until your marginal rate is lower.
— Offshore bonds can benefit UK investors seeking income through
corporate bonds, gilts and cash on deposit.
— Offshore bonds allow you to defer tax on income until you move to a lower-rate
jurisdiction.
— Offshore pensions may offer 30% tax-free cash, reduced death duties, freedom
to invest in residential property and do not require you to buy an annuity —
if you are planning to emigrate.
How the pension rules work:
— Any UK resident can take out a qualified registered overseas pensions scheme,
but they are designed primarily for people who expect to move or retire
abroad.
— You can transfer funds accumulated here to an offshore pension.
— New contributions to an offshore pension will get tax relief only if
they are based within the European Union. With offshore pensions based in
havens such as the Isle of Man, you may get no tax relief.
— To take out an offshore pension, you need to speak to an adviser specialising
in offshore pensions. Charges are generally higher, too.
