Offshore Benefits - A Look at the benefits of investing offshore

Written by Bank of Scotland International Limited

Thursday, 20 November 2008 00:33

In this article Bank of Scotland International explains some of the key benefits of investing and banking offshore. The article explains the basics behind offshore trusts and company formations, as well as how domicile affects tax and inheritance status.

Offshore banking

· Non UK domiciled UK residents – income and capital gains retained offshore are not taxed in the UK unless/until “remitted”. Generally speaking, any use or benefit obtained in the UK by reference to funds retained abroad will count as a remittance. Non UK domiciled individuals who have been UK resident for seven out of the previous nine tax years must, with effect from 6 April 2008, pay an additional £30,000 charge in any tax year in which they wish to claim the benefit of the remittance basis.

· All depositors enjoy gross payment of their interest on funds deposited offshore. Of course, UK residents are fully taxable in respect of such interest (subject to remittance basis treatment in the case of a non domiciled resident). Moreover, EU resident depositors must authorise the details of their account to be supplied to the tax authorities in order to avoid EU retention tax at 15% (20% from July 2008).

Offshore trusts

· If you are UK resident but non UK domiciled you can shelter assets from 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”, i.e. a 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 additional charge if appropriate). No liability arises unless and until a capital payment is made.

· If you are 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 when trustees make capital gains, but only on distribution to UK resident beneficiaries (who may avoid tax under the remittance basis if they themselves are non UK domiciled).

· Non UK residents do not pay CGT in any event.

· If you are non UK domiciled a trust can be created to hold non UK assets, which can remain outside the scope of inheritance tax (IHT), even should you yourself subsequently become UK domiciled (for example, by remaining in the UK for 17 out of 20 tax years). UK assets should be placed in the ownership of an offshore company owned by the trustees. Such trusts are often described as “excluded property trusts” for IHT purposes. Unless a trust is an excluded property trust, IHT charges will arise at 6% every 10 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 (for example, 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.

· If you are non UK resident and own UK property which generates an income, for example, rents, then this income will be exposed to UK tax at a maximum rate of 40%. This exposure can be reduced to 20% by owning the property in an offshore company.

· 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%, and on any extraction of the proceeds from the company you will pay tax at either 18% or 25%. The cumulative tax burden is therefore 41% if the company is wound up after making the disposal, or 46% if it pays you a dividend. If, instead, an offshore company is used the individual CGT rate of 18% will apply to the capital gain provided the proceeds are distributed by a liquidation of the company within three years.

· An offshore company can also be used to shelter from CGT capital gains arising on the sale of assets other than UK land, for example, 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 life 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 personalised bond, the investment return within the policy can roll up tax free. Tax only arises at the point at which the policy is surrendered, encashed 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 5% of the initial capital is available, thereby generating an effective tax free income steam.

· Non UK domiciled policyholders are not required to pay the £30,000 additional charge (even if otherwise appropriate) in order to enjoy the benefits of gross roll up or 5% withdrawal described above.

Reflects law and practice at 1st October 2008.

Note is generic guidance only and cannot be relied on as advice in specific cases - advice should always be sought from a professional adviser.

This area of tax law is extremely complex so all actions must be thought through carefully.